Petition for Writ of Certiorari — Reel Hooker Sportfishing, Inc. v. Hawaii Department of Taxation

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Supreme Court, U.S.

FILED

ie 10-95) AN LS 2011

: ; INTHE OFFICE OF THE CLERK

Supreme Court of the Wnuited States

REEL HOOKER SPORTFISHING, INC.,

EXACT GAME FISHING, ING., FINEST KIND, INC.,

PETITIONERS

STATE OF HAWAI'I, DEPARTMENT OF ‘TAXATION

PETITION FOR A WRIT OF CERTIORARI

TO THE INTERMEDIATE COURT OF APPEALS

OF HAWAI'I

PETITION FOR WRIT OF CERTIORARI

DENNIS NILES

Counsel of Record

KLIZABETH BREY

Paul, Johnson, Park

& Niles

27145 Kaohu Street

Suite 208

Watluku, HI 96798

DNiles@pjpn.com

(808) 242-6644

CURRY & TAYLOR @ 202-393-4141

QUESTION PRESENTED

Section 445 of the Omnibus Maritime and Coast

Guard Improvements Act of 2002, 38 U.S.C. § 5(b),

provides that “{n]o taxes, tolls, operating charges, fees, or

any other impositions whatever shall be levied upon or

collected from any vessel or other water craft, or from its

passengers or crew, by any non-Federal interest” 1f the

vessel operates on navigable waters.

The question presented is whether, in exempting

certain vessels and the passengers they carry from local

taxation, § 5(b) precludes taxation of the operator ofa tax

exempt vessel on the basis of the gross fares paid by tax

exempt passengers.

RULE 29.6

Petitioners are Reel Hooker Sportfishing, Inc.,

Exact Game Fishing, Inc., and Finest Kind, Inc.; each isa

corporation organized under the laws of the State of

Hawat 1.

Petitioners’ capital stock is owned by David

Hudson; none of the corporations has a parent or publicly

held company owning 10% or more of Petitioners’ stock.

Respondents are the Hawaii Department of

Taxation and its director, Kurt Kawafuchi.

222

TABLE OF CONTENTS

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REASONS FOR GRANTING THE PETITION..........2...c0c00eceeeeeceeee 17

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APPENDIX

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Hawai Intermediate Court of Appeals Judgment ........... 3a

Hawai" Intermediate Court of Appeals Opinion .............. 5a

Hawar’t Tax Appeal Court Judgment ...........cccccccccccccceseees Zia

Hawai'i Taz Appeal Court Order..............cccccscescccsssseess 2 eon

Hawai? Tax Appeal Court Order............. nai Lane 27a

Hawai't Tax Appeal Court OTde?.......00.....ccccccccssservessevecsnds OOO

Hawarvi Tax Appeal Court Order................. pore ola

Hawai’ Land & Tax Appeal Court of the First

Circuit Transcript of Proceedings ............0cc0ccec cece ceceeeees OFA

Pertinent Statutory History................. | o6a

TABLE OF AUTHORITIES

Page

CASES

ALOHA AIRLINES V. DIR. OF TAXATION OF HAWATT,

SES US. 7, POR ICT. SOT CABS) cvcnccccncesccconseccccesess 1G. 23. 22. 23

ALTRIA GROUP, INC. V. GOOD, 555 U.S. __, , IZ

aT re a audneduuanauvaneees Re:

BACCHUS IMPORTS. LTD. V. DIAS, 468 U.S. 268, 267,

gy Rey 8 RARER aap ON PRA Se 16

BATES V. DOW AGROSCIENCES LLC, 544 U.S. 431,

ME ena ca conus ticascescaun sive Soe das caisdocnaas adeccascas cidnicaseemenesaicienunxes 18

CLYDE MALLORY LINES V ALABAMA EX REL. STATE

DOCKS COMM'N, 296 U.S. 261, 265-266, 56 S.CT. 194

Direc: nicesscecsa th eradniarwhcacrcaetaunsles basin aukacel ees aaakensaceineecwasuiae 1]

DEPT. OF NATURAL RES. V. ALASKA RIVERWAYS

ite ee Rae, Rae CEA DO) vsisce ics sesccccctsascccencevossnces 26

FAIRBANK V. UNITED STATSS, 181 U.S. 283, 21 S.CT

I eka re an bese casadduensaneessene ns 24

FLORIDA LIME & AVOCADO GROWERS, ING. V. PAUL,

ee eae ie Ie RE ok cc snncnc cds cov vesnacceeencessdusnncesdvesinenechour's 18

FOREMOST INS. CO. V. RICHARDSON, 457 U.S. 668,

Be er 0 I I os vipene cn cnce cdassncencaccnceasasecstuaxcacevicsntensios 30

FRANKLIN NAT'L BANK V. NEW YORK, 347 U.S. 373,

I I i gorricch cs, soa cackauc caves devaseanderon¥deauneoeniacheadeswsndseaes 28

EREIGHTLINER CORP. V. MYRICK, 514 U.S. 280, 288-

SB ee I IY aes ccpcaccatneansiaceignussdigelimisiaonsccmauwes 21

GEIER V. AMERICAN HONDA CoO., 529 U.S. 861, 874,

ce Se auiasawuchiseantunaitansilal 28

GIBSON V. UNITED STATES, 166 U.S. 269, 17S. CT

Be ee ig ey Me IE Bi sss ciasiccence dais nacivdwessrammacmesss ncnoacaveccins 29

GLOUCESTER PERRY Co. V. PENNSYLVANIA, 114

US. 106, FO -BOk, BOG (UBB) oo sccccciceseoscsccnsouscacrvese 9, 18, 23, 29

HENDERSON V. MAYOR OF NEW YORK, 92. USS. 259

EI has cic acts naviave cua nwaccesduembuae snails aiauaaeiterselaee 9,10, 24

JAPAN LINE, LTD. V. COUNTY OF LOS ANGELES, 441

U.S. 434,441-445, 99 S.CT. 1818 (1979)....................... it, tf 33

KAISER AETNA V. UNITED STATES, 444 U.S. 164

ITI ccs a nsaiPaietacsshaisbvasconcnasetn sco a uaceaietatuatondedeade ce eeamasset seielscaie ascamaaseuniaiainints 19

LEOVY V. UNITED STATES, 177 U.S. 621, 20S CT. 797,

Oe i, ee I tice indemueedie ereanttscauceomneuecetsepelanes 30

LEWIS V. CITY OF CHICAGO, ILL., US. , 130

i ce ins ve hcs ons acueccentbevcuemennsaniniaeacaxeenant 21

POLAR STAR, INC. V. CITY OF VALDEZ, __ U.S. __

Fes eee PD ceeiseincivcics-ncenccssneckoamtantinnsie i. 22.

RIEGEL V. MEDTRONIC, INC.,552 U.S. ,_ si, 128

ns I I iin eee ea aces 18

SPREITSMA V. MERCURY MARINE, 537 U.S. 51, 62-63

RRA I AO RAMEN AT ENC NONI E RR TET MPN eNO 21

UNITED STATES V. HVOSLEF, 237 U.S. 1,35 S.CT. 459

CR ee AT ER MTT

UNITED STATES V. INTERNATIONAL BUSINESS

MACHINES CorpP., 517 U.S. 8438, 856 N.3, 116 S.CT.

SE ID 25s i: sci uccettscas aa vadteasavasn cpus onllwaaetinusadeeanan mannan cenmnaaonoaeas 24

UNITED STATES V. LOC KE, 529 U.S. 89, 108, 120 S.CT.

II si-iicicosies uatca'xaiescknetcusete keniatguo ey actabaiuueke pomiammaanaante 18, 19, 29

YOUNG V. COLOMA-AGARAN, 340 F.3D 1053, 1055

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STATUTES

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]

Reel Hooker Sportfishing, Inc., Exact Game

Fishing, Ine. and Finest Kind, Ine. (collectively,

“Petitioners”) petition for a writ of certiorari to review

the opinion and judgment of the Intermediate Court of

Appeals of the State of Hawaii (the “ICA”).

The ICA erred in construing federal law as

allowing the state to base Petitioners’ liability for

general excise taxes on the gross earnings of their tax

exempt vessels where the sole source of those earnings

are fares paid by passengers who themselves are

exempt from local taxation.

OPINIONS BELOW

The opinion of the ICA is reported at 123

Hawai i 494 and 236 P.3d 1230 (Haw. App. 2010), and is

in the Appendix at 5a (hereinafter “A._a”). The ICA

entered judgment on appeal on August 31, 2010,

affirming the consolidated judgment of the Tax Appeal

Court entered December 22, 2008. A.2la. While

acknowledging vessel passengers bore the financial

impact of the levy, the ICA concluded federal law did

not preclude Hawaii from measuring Petitioners’

liability for GET on the basis of the gross fares paid by

their otherwise tax exempt customers. A.1]4a.

On October 19, 2010, the Hawari Supreme Court

declined review of the opinion and ensuing judgment.

A.la-2a.

JURISDICTION

The Hawaii Supreme Court _ rejected

Petitioners’ application for certiorari on October 19,

2010. A.la-2a.

The jurisdiction of this Court is invoked

pursuant to 28 U.S.C. § 1254(1).

RELEVANT PROVISIONS INVOLVED

U.S. Const., art. VI, cl. 2, provides in relevant

part:

This Constitution, and the laws of the United

States which shall be made in pursuance thereof

. Shall be the supreme Law of the Land; and

the Judges in every State shall be bound

thereby, any Thing in the Constitution or Laws

of any State to the Contrary notwithstanding.

33 U.S.C. § 5(b), as adopted in 2002, provided:

No taxes, tolls, operating charges, fees, or any

other impositions whatever shall be levied upon

or collected from any vessel or other water craft,

or from its passengers or crew, by any non-

Federal interest, if the vessel or water craft is

operating on any navigable waters subject to the

authority of the United States, or under the

right to freedom of navigation on those waters,

except for

(1) fees charged under of this title;

(2) reasonable fees charged on a fair and

equitable basis that--

(A) are used solely to pay the cost of a service to

the vessel or water craft;

(B) enhance the safety and efficiency of

interstate and foreign commerce; and

interstate or foreign commerce.

A.57a-58a (Emphasis supplied).

Section 5(b) was amended in 2003 to allow

“property taxes on vessels or watercraft .. . if

those taxes are permissible under the United

States Constitution.”

A.62a; See 33 USC § 5(b)(8).

33 U.S.C. § 2286 provides in relevant part:

(a) Consent of Congress

Subject to the following conditions, a non-

Federal interest may levy port or harbor dues

(in the form of tonnage duties or fees) on a vessel

engaged in trade entering or departing from a

harbor and on cargo loaded on or unloaded from

that vessel...

(1) Purposes

Port or harbor dues may be levied only in

conjunction with a harbor navigation project

whose construction is complete (including a

usable increment of the project) and for the

following purposes and in amounts not to exceed

those necessary to carry out those purposes:

(A)? to finance the non-Federal share of

construction and operation and maintenance

costs of a navigation project for a harbor under

the requirements of section 2211 of this title; or

(ii) to finance the cost of construction and

operation and maintenance of a _ navigation

project for a harbor under section 2232 or 2233 of

this title; and

(B) provide emergency response services in the

harbor, including contingency planning,

necessary personnel’ training, and_ the

procurement of equipment and facilities.

(4) Formulation of port or harbor dues

Port or harbor dues may be levied only on a

vessel entering or departing from a harbor and

its cargo on a fair and equitable basis. In

formulating port and harbor dues, the non-

Federal interest shall consider--

(A) the direct and indirect cost of construction,

operations, and maintenance, and providing the

facilities and services under paragraph (1) of this

subsection;

(B) the value of those facilities and

services to the vessel and cargo;

(D) any other pertinent factors.

(b) Jurisdiction

(1) The district court of the United States for the

district in which is located a non-Federal interest

that levies port or harbor dues under this section

has original and exclusive jurisdiction over any

matter arising out of or concerning, the

imposition, computation, collection, and

enforcement of port or harbor dues by a non-

Federal interest under this section.

(2) Any person who suffers legal wrong or is

adversely affected or aggrieved by the

imposition by a non-Federal interest of a

proposed scheme or schedule of port or harbor

dues under this section may, not later than 180

days after the date of hearing under subsection

(a)(5)(A)(iil) of this section, commence an action

to seek judicial review of that proposed scheme

or schedule in the appropriate district court

under paragraph (1).

(3) On petition of the Attorney General or any

other party, that district court may--

(A) grant appropriate injunctive relief to

restrain an action by that non-Federal interest

violating the conditions of consent in subsection

(a) of this section;

(B) order the refund of any port or harbor dues

not lawfully collected; and

Haw.Rev.Stat. § 237-18(6)(A) provides _ in

relevant part:

part:

Upon every person engaging or continuing

within the State in any service business or

calling . . ., there is likewise hereby levied and

shall be assessed and collected a tax equal to four

per cent of the gross income of the business .. ..

Haw.Rev.Stat. defines “Service business

‘

or calling” to include “all activities engaged in for

other persons for a consideration which involve

the rendering of a service, including professional

and transportation services ” (Emphasis

supplied).

Haw.Rev.stat. § 237-41.5 provides in relevant

(a) There shall be personal liability for the

ilgeneral excise] taxes imposed under this

chapter as provided in this section for the

following amounts of ross income or gross

proceeds:

(1) Any amount collected as a recovery of the

taxpayer's lability under this chapter, where the

amount is passed on as the tax owed by the

taxpayer under this chapter for the transaction

and is separately stated or accounted for in a

receipt, contract, invoice, billing, or other

evidence of the business activity; or

(2) An amount equal to the tax lability under

this chapter on a transaction where a taxpayer

does not separately state or account for the

amount as a tax recovery as_ provided in

paragraph (1). For purposes of this paragraph,

the amount of the imputed tax liability is the

result of multiplying the gross income or gross

proceeds received in the transaction by the tax

rate.

The amounts under paragraphs (1) and (2) shall

be held in trust for the benefit of the State and

for payment to the State in the manner and at

the time required by this chapter.

STATEMENT

B Nature of the Case.

Petitioners began their challenge of the

assessment of General Excise Taxes (“GET’’) on the

charter earnings of their vessels through separate

complaints filed in the state Tax Appeal Court. A.7a.

Eventually consolidated the complaints sought a

declaration that § 5(b) preempted the assessments and

a refund of GET paid under protest. A.&a.

The Tax Appeal Court heard the parties’ cross-

motions for summary judgment on November 3, 2008.

A.34a. On December 22, 2008, the court entered orders

granting Respondents summary judyment and denying

(

Petitioners’ opposing motions. A consolidated judgment

dismissing all claims was entered that day. A.22a.

Following timely appeal, the ICA ruled that §

o(b) “does not preempt the assessment of Hawaii GET

on the charter fishing revenue of these Hawari

businesses because GET is a tax assessed on gross

business receipts for the privilege of doing business in

Hawaii and is not a tax on their vessels or passengers.”

A.6a-7a.

2. Exemption of Vessels Operating on

Navigable Waters and Their

Passengers.

section 445 codified the limits on the power of

local authorities to tax vessels operating on navigable

waters and their passengers. A.55a. The underlying

problem was characterized as_ involving “local

jurisdictions seeking to impose taxes or fees on vessels

‘merely transiting or making innocent passage through

navigable waters subject to the authority of the United

States that are adjacent to the taxing community. We

are seeing instances in which local communities are

seeking to impose taxes and fees on vessels even where

the vessel is not calling on, or landing, in the

community.” A.54a. The response, however, was a

broad general ban on “taxes, tolls, operating charges,

The

fees or any other impositions whatever.” A.57a.

» harbor

)

only exceptions were for assessments relating t

improvements under the Water Resources

Development Act of 1998', or the “extremely limited

In 33 [ ». 4 yY 2236 ( oneyeress consent LO port or harpor aue

S doe

the form of tonnage duties or fees on certain vessels enguged in

circumstances in which reasonable fees can be charged

on a fair and equitable basis for the cost of service

actually rendered to the vessel.” A.54a. “Generally,

taxes will not be allowed under this section.” /d.

Congress did not write on a blank slate in

clarifying the sole circumstances under which certain

vessels, their crew and passengers could be taxed.

Section 445 mirrors, as one example, this Court’s early

decision extending to corporate owners the benefit of

Commerce Clause limits on the power of states to tax

vessels; namely, “exemption from charges other than

such as are imposed by way of compensation for the use

of the property employed, or for facilities afforded for

[their] use, or as ordinary taxes upon the value of the

property.” Gloucester Ferry Co. v. Pennsylvania, 114

U.S. 196, 203-204, 835 (1885). Among the decisions

canvassed by the Court is Henderson v. Mayor of New

York, 92 U.S. 259 (1875) which invalidated taxation of

the dividends of ferry operator. Dispositive of the issue

was the ultimate effect of the tax on passenger and

vessel:

In whatever language a statute may be framed,

its purpose must be determined by its natural

and reasonable effect; and if it is apparent that

the object of this statute, as judged by that

criterion, ts to compel the owners of vessels to

pay a sum of money for every passenger

trade entering or departing from a harbor levied in conjunction

with certain harbor improvements. Fees must be levied on a “fai

and equitable basis.” Any person who suffers legal wrong or is

adversely affected or aggrieved by their imposition may seek

judicial review in federal court and a refund.

brought by them from a foreign shore, and

landed at the port of New York, it is as much a

tax on passengers if collected from them, or a

tax on the vessel or owners for the exercise of

the right of landing their passengers in that city,

as was the statute held void in the Passenger

Gloucester Ferry also reiterated that the power

to regulate commerce “embraces within its control all

the instrumentalities by which it may be aided and

conducted; to determine when it shall be free, ‘and

when it is subject to duties or other exactions.”

The subjects, therefore, upon which the power

may be exerted are of infinite variety. While

with reference to some of them, which are local

and limited in their nature or sphere of

operation, the states may prescribe regulations

until congress intervenes and assumes control of

114 S. at 832. Section 445 is a prime example of the

exercise of the paramount authority of Congress over

vessels engaged in commerce on navigable waters

Section 445’s express exceptions also. reflect

Tonnage Clause jurisprudence. The clause reads: “No

state shall, without the Consent of Congress, lay any

Duty of Tonnage.” U.S. Const. Art 1, see. 10, cl.3. It

“embraciles}] all taxes and duties regardless of their

name or form, even though not measured by the

Lonnage OF a vessel, which Operate tO Impose a Charge

for the privilege of entering, trading in or lying in a

port.” Polar Star, Inc. v. City of Valdez, U.S. _,

129 S.Ct. 2277, 22838 (2009), citing Clyde Mallory Lines

v Alabama ex rel. State Docks Comm’n, 296 U.S. 261,

265-266, 56 S.Ct. 194( 1935). The clause protects vessel

and owner alike. Polar Star, Inc., 129 S.Ct. at 2283.

jut states are allowed, as Clyde Mallory Lines shows,

to recover from vessel operators a reasonable charge

reflecting the cost of facilities and services available to

visiting vessels. Section 445 expressly preserves if not

sharpens this long established exception to the Tonnage

Clause.

section 445 failed, however, to preserve another

important exception to the limits on state power to tax

vessels - - when they are taxed as property:

, a nondomicillary jurisdiction may

constitutionally tax property when that property

has a ‘substantial nexus’ with that jurisdiction,

and such a nexus is established when the

taxpayer ‘avails itself of the substantial privilege

of carrying on business’ in that jurisdiction

Polar Star, Inc., 129 S.Ct. at 2284, citing Japan L

Lid. v. County of Los Angeles, 441 U.S. 434,441-445, 99

S.Ct. 1813 (1979). The omission was apparent by the

next session of Congress. A.59a. The conference

committee headed by Mr. Young’ recommended

amendment to reinstate the power to levy property

taxes. A.60a. The amendment was retroactive to

November 25, 2002, “[tlo assure the. consistent

application of legal principles concerning non-Federal

taxation of interstate transportation equipment.” /d

—

In the conference committee report submitted on

October 29, 2003, Mr. Young observed:

The legislation [the Vision 100 Century of

Aviation Reauthorization Act] includes a section

that amends section 4(b) of the Rivers and

Harbors Appropriations Act of 1884 to clarify

that the restriction in that section with respect

to taxes on vessels or other water craft does not

apply to property taxes on vessels or water craft

so long as those taxes are constitutionally

permissible under long-standing — judicial

interpretations of the Commerce Clause.

ld. The report then cites prior decisions of this Court,

including Japan Line, sustaining taxation of vessels as

property so long as it is “fairly apportioned, does not

discriminate against interstate commerce, and is fairly

related to the services provided by the taxing entity.”

Id. “Clarification” was thus necessary to reinstate the

property tax exception swept away by section 445.*

The committee report then notes ambiguously

that “section 4(b) does not affect whether sales or

income taxes are applicable with respect to vessels.”

ld. The commentary concludes: “The purpose of

section 4(b) was to clarify existing law with respect to

~ This Court appears divided whether a duty of tonnage could pass

muster under the Tonnage Clause if it takes the form of a property

tax. See Polar Star, Inc., 129 S.Ct. at 2288 (opinion of ROBERTS

CJ, concurring in part) (“Il do not see how an unconstitutional tax

on maritime commerce becomes permissible when bundled with

taxes on other activities or property.”). In any event Congress in

enacting section 445 provides the requisite consent

trade. Jd. The license affords unrestricted access to

the navigable waters surrounding Maui, Lanai and

Molokai. 7d.‘

Petitioners charter their vessels to individuals

wishing to fish those waters for pelagic game fish such

as marlin and dolphin fish (mahimahi). A.7a. Charter

fishing is among the activities that define a “commercial

vessel.” H. Admin. R. § 13-231-54. Operation of such

vessels in Hawaii requires a commercial use permit

issued by the state Department of Land and Natural

Resources. /d. The permits are conditioned on a use

fee that is based, as in the case of GET, on a percentage

of the operator’s “gross receipts.” Haw.Rev.Stat. §

200-10(¢)(4).°

Fares paid by passengers are the principal

source of Taxpayers’ earnings. A.7a. Since beginning

operations decades ago, Taxpayers have added GET to

the charter fares collected from their passengers, a

4 Young v. Coloma-Agaran, 340 F.3d 1053, 1055 (9th Cir. 2003

(federal coasting license entitles vessels to engage in coastwist

trade on Hanalei Bay, Kauai, including transportation

passengers)

’ The commercial use fee attaches to “all moneys paid or payable to

the account of the vessel owner, for the rendition of services, or

resulting from trade, business, commerce, or sales by the vessel

owner when the services, trade, business, commerce, and sales

have a direct relationship to the vessel.” H. Admin. R. § 13-231-56

The commercial use fee increased in 2005 from two to three

percent of the permit holder’s gross receipts. Haw.Rev.Stat. §

Z200-10(e)(A).

practice that is industry wide. /d.° At the heart of this

controversy is the assessment of GET on Petitioners’

gross income from their charter fishing business. A10a-

lla.

Proceedings in the Intermediate Court of Appeals.

The court below concluded the exemption of

Petitioners’ vessels, their crews, and passengers did not

prevent local taxation of passenger fares so long as the

levy was on the vessel operator: “The federal statute

refers only to vessels and their passengers and crews,

and simply does not address the business revenue or

gross income generated by a business that operates the

vessel.” A.12a. The panel distinguished this Court’s

decision in Aloha Airlines v. Dir. of Taxation of

Hawaii, 464 U.S. 7, 104 S.Ct. 291 (1983), because the

Airport Development Acceleration Act of 1973

(“‘ADAA”) prohibited state taxation of airline

passengers or “‘the sale of air transportation or on the

gross receipts derived therefrom.” Id.’ Section d(b)

does not refer to a vessel's gross receipts, thus the ICA

saw no basis for express preemption: “Particularly in

light of the strong presumption against preemption, we

decline to broadly construe the term ‘vessel’ to include

confined to the boating industry Hawai’

are allowed by law to pass on their general excise tax

> lied . . . . v9 ¥ > ./? .

5 te istomer iSa cost recovery. oee e.g. Bacchus Imports,

Dras, 468 U.S. 263, 267, 104 S.Ct. 38049 (1984) (upholding

taxpayer-Wholesalers of alcoholic beverages who

riminatory excise tax on to their customer's)

sence of the italicized phrase is inconsequential. The

ADAA did not ban taxation of the instrumentality itself, as does §

the gross income generated by a taxpayer’s use of its

vessel.” A.13a.

The indirect effect of the assessment on exempt

passengers was dismissed. The court acknowledged

Petitioners treat GET “as a pass-through charge to

their customers/passengers,” yet this fact “does not

change the nature of the GET from a tax on their

businesses to a tax on their customers.” A.14a.

Lastly, the court below rejected Petitioners’

claim of implied preemption. A.17a. First, the panel

saw no conflict with federal law because state law did

not require charter boat operators to pass through GET

to their passengers. A.l4a. It also disagreed that the

assessments at issue pose an obstacle to federal

regulation of the nation’s waterways. A.17a. As to field

preemption, the ICA concluded: “While we recognize

the broad scope of federal maritime legislation, we fail

to see how the imposition of GET on the gross receipts

of Taxpayers’ charter fishing businesses interferes in

any way with the uniform federal regulation of

maritime commerce.” A.16a-17a.

REASONS FOR GRANTING THE PETITION

as The Lower Court’s Approach to the

Preemptive Scope of § 5(b) Conflicts

With Relevant Decisions of This

Court.

The court of appeals labored under the mistaken

view that in determining the preemptive scope of § 5(b)

it should, as a general rule, “accept the reading that

disfavors preemption.” A.9a, citing Bates v. Dow

Agrosciences LLC, 544 U.S. 481, 449 (2005). Thus, the

“eonsiderable” burden was placed on Petitioners “‘

to overcome the [“strong”] starting presumption that

Congress does not intend to supplant state law.’”

A.10a, quoting Florida Lime & Avocado Growers, Inc.

v. Paul, 373 U.S. 132, 142 (1968). This is no longer the

approach, however, where Congress has expressly pre-

empted state law. Riegel v. Medtronic, Inc., 552 U.S.

__, __, 128 S.Ct. 999, 1003 (2008) (construing the

express pre-emption provision of the Medical Device

Amendments of 1976 without reference to the

presumption against pre-emption); Altria Group, Inc. v.

Good, 555 U.S. __, __, 129 S.Ct. 538, 558 (2008)

(THOMAS, J., dissenting opinion) (“In light if Rvegel,

there is no authority for invoking the presumption

against pre-emption in express pre-emption cases.”).

Given the unequivocal wording of § 5(b), analysis of its

pre-emptive scope does not begin with artificial

presumption,

The lower court’s heavy reliance on_ the

presumption in deciding the scope of express pre-

emption under § 5(b) was misplaced for a second reason.

The presumption is “not triggered when the State

regulates in an area where there has been a history of

significant federal presence[,]’ such as maritime

commerce. United States v. Locke, 529 U.S. 89, 108, 120

S.Ct. 11385 (2000). The Supreme Court long ago

recognized the paramount authority of Congress to

regulate maritime commerce. It is “the power to

prescribe the rules by which it shall be governed, that

is, the conditions upon which it shall be conducted; to

determine when it shall be free, and when subject to

duties or other exactions.” Gloucester Ferry Co. v.

Pennsylvania, 114 U.S. 196, 203-204 (1885) (emphasis

added); accord Kaiser Aetna v. United States, 444 U.S.

164 (1979)... When Congress exercises that authority,

as it did in adopting § 5(b), there is no role for the

presumption against pre-emption. Locke, 529 U.S. at

108: “. ..in this area [national maritime commerce]

there is no beginning assumption that concurrent

regulation by the State is a valid exercise of its police

power.” In view of the express exemption of

Petitioners’ vessels and their passengers from local

taxation, it was wrong to presume that Congress

intended such taxes could be collected by assessing

owner-operators of those vessels on the basis of the

gross amount of passenger fares.”

2. The Question Presented is Important

and Will Likely Arise Again.

Petitioners are representative of the hundreds of

commercial vessels that operate across the Hawaiian

islands. Upwards of one hundred such vessels carrying

up to 149 passengers operate from Maui’s principal

small boat harbors at Lahaina and Maalaea, and off the

beach at Kaanapali. As many as 400 permits may be

*"The power to regulate commerce comprehends the control for

that purpose, and to the extent necessary, of all the navigable

waters of the United States which are accessible from a State

other than those in which they lie. For this purpose they are the

public property of the nation, and subject to all the requisite

legislation by Congress.” Kaiser Aetna, 444 U.S. at 172 (citations

omitted).

? The presence of an express pre-emption clause in § 5(b) affects

only analysis of Petitioners’ claim of implied pre-emption. See

Freightliner Corp. v. Myrick, 514 U.S. 280, 288-289, 115 S.Ct. 1483

(1995) (rejecting categorical rule precluding the coexistence of

express and implied pre-emption).

issued to commercial vessels operating from all state

facilities statewide. See H. Admin. R. § 13-231-58 and

59, and H. Admin. R. § 13-231-67.

Paradise Cruise, Limited, amicus in the court

below, operates even larger tour boats. Hawaii's

largest operator, the company offers fourteen different

ocean excursions daily from four different state

harbors. It carries over 400,000 passengers annually,

passengers who have traveled to Hawaii from around

the world. The broad impact of the taxation at issue is

indisputable.

The preemptive reach of § 5(b) and allocation of

the burden of persuasion are issues that touch the

fundamental relationship between the _ federal

government and the states. The court of appeals

ignored the practical effect of the assessments on

passengers and erroneously relied on the presumption

against pre-emption. If left to stand the reported

decision of the court of appeals will govern

administration of local tax laws. This Court should take

this opportunity to make clear that pre-emption in suct

cases turns not on its label, but on the effects of the tax,

both direct and indirect.

3. The Decision of the Lower Court is

Incorrect.

Federal law may pre-empt state law expressly

or by implication." Freightliner Corp. v. Myrick, 514

The doctrine has its origin in the Supremacy Clause Phi

Constitution, and the Laws of the United States which shall be

made in Pursuance thereof; and all Treaties made, or which shall

U.S. 280, 288-289, 115 S.Ct. 1483 (1995). A federal

statute will override state law if its scope indicates

Congress intended federal law to occupy the legislative

field exclusively, or if there is an actual conflict

between state and federal law. /d. at 287.

a hapre SS pre é mption

When a federal statute “contains an express pre

emption clause, the task of statutory construction must

in the first instance focus on the plain wording of the

clause, which necessarily contains the best evidence of

Congress’ pre-emptive intent.” Spreitsma v. Mercury

Marine, dol U.S. ol, 62-63 (2002); Aloha Airlines v. Dir

of Taxation of Hawaii, 464 U.S. at 12 (“when a federal

statute unambiguously forbids the States to impose

particular kind of tax on an industry affecting

interstate commerce, courts need not look beyond the

plain language of the federal statute to determine

whether a state statute that imposes such a ta»

preempted.”); see also, Lewis v. City of Chicago, I

U.S , 1380 5.Ct. 2191, 2200 (2010) (“LiJt 1s not for

us to rewrite the statute so tnat it covers only what wi

think 1s necessary to achieve what we think Congr

really intended:

The wording of § 5(b) allow no adqoudt as to

intent of Congres Ta) pore empt LAS Lax i] ()?

) > , , ‘

Petitioners vessel ind = thei pDassengel 1LOMLU

leriines 1s illustrative. At issue there was whetl

be made. under the Authority of the Unit

ipreme Law of tne Land: ind the hudas every Lal

hound thereby. any lhing inthe Constitution or Law iany Lute

}

to the Contrarv notwithstanding | ( net int J |

219)

ADAA preempted assessment of GE'T on the gross

receipts of an airline. In relevant part, the act read:

No State... shall levy or collect a tax, fee, head

charge, or other charge, directly or indirectly, on

persons traveling in air commerce or on the

carriage of persons traveling in alr commerce or

on the sale of air transportation or on the gro

receipts derived therefrom

Despite the lack of ambiguity, the Hawai

Supreme Court held airline earnings were subject t

GET. This Court reversed, explaining

The plain language of 49 U.S.C. § 1515(a) would

ppear to invalidate Haw.Rev.Stat 239-6

1513(a) expressly preempts gross receipts taxe

the sale of air tran sporctatlion or the Carriaye

ff perso traveling in air commerce, and

Haw. Rev.Stat. § 239-6 is a state tax on the vro

eceipts of airline elling alr transportation and

irrying perso raveling in alr commerce he

oawal Supreme Cou ught te VOL [

re nflict | OK evyond the languav

ld] { ( } r"é ia ay ,

: re A f h1aiv i 1] rs

our inalysi iy vhen a federal bu

unambiguou ly forbid the State LO Impose i

irticular kind of tax on an industry Wiecting

Interstate commerce, courts need not look

beyond the plain language of the federal statute

to determine whether a_ state statute that

Imposes such a tax is pre-empted. Thus, the

Hawaii Supreme Court erred in failing to give

effect to the plain meaning of § 1513(a)

‘

464 U.S. at 11-12 (citations omitted)

Section 5(b) is equally unambiguou: It to

expressly forbids some taxes, while allowing other

There is simply no room for questioning the intent of

Congress to expressly preempt state taxation of vesse!

and their passengers. The lower court acknowledged

Petitioners treat GET “as a pass-through charge to

their customers/passengers,’ yet it deemed the

financial impact on them insufficient to implicate § 5(b)

A.1l4a. The conclusion is plainly mistaken and warrant

review on certiorart.

It has long been the rule that a tax on the

earnings of a vessel is in effect a tax on its passenger

since, as here, the exaction is ultimately paid by thi

passenper. Gloucester Ferry ('o , supra, 114 (J =. Atal

(citing Henderson v. Mayor of N.Y., 92 U.S. 259 (1875

(striking down tax imposed on dividends of ferry

company). /lenderson held that a state law requirn

an owner of a vessel to give a bond for each passenye

was unconstitutional, explaining that

In whatever languaye a Statute may te

framed, its purpose must be determined by it

natural and reasonable effect: and if it

apparent that the object: of this) statute,

judged by that criterion, is to compel the owner

of vessels to pay a sum of money for every

passenger brought by them from a foreign

shore, and landed at the port of New York, it is

as much a tax on passengers if collected from

them, or a tax on the vessel or owners for the

exercise of the right of landing their passengers

in that city, as was the statute held void in the

Passenger Cases.

92 U.S. at 268.

The rule finds parallel in Export Clause cases.

The clause states: ‘No Tax or Duty shall be laid on

Articles exported from any State.’ U.S. Const., Art. I, §

9, cl. 5. The clause has never been read as being limited

to taxes on articles, but instead has been held to

prohibit federal taxation of services and activities

closely related to the export process. United States v.

International Business Machines Corp., 517 U.S. 848,

856 n.3, 116 S.Ct. 1793 (1996), cating inter alia Fairbank

v. United States, 181 U.S. 2838, 21 S.Ct. 648 (1901) and

United States v. Hvoslef, 237 U.S. 1, 35 S8.Ct. 459 (1915).

Fairbank involved a federal stamp tax on bills of

lading for export shipments imposed by the War

Revenue Act of 1898. The Court found that the tax was

facially discriminatory, 181 U.S. at 290, and, though not

directly imposed on the goods being exported, the tax

was nevertheless “in effect a duty on the article

transported.” Jd., at 294.

Hvoslef involved taxes on ship charters which

did not facially discriminate against exports. The Court

nonetheless prohibited the application of those

generally applicable, none'scriminatory taxes to the

transactions at issue because euch tax was, in effect, a

tax on exports. The type of charter contract at issue in

Hvoslef was deemed “in contemplation of law a mere

contract of affreightment,” 237 U.S., at 16. As applied

to charters for exportation, the tax “was in substance a

tax on the exportation; and a tax on the exportation is a

tax on the exports.” Jd., at 17.

In Bacchus imports, Ltd. v. Dias, supra, the

State argued wholesalers were not entitled to a refund

of GET “since they did not bear the economic incidence

of the tax but passed it on as a separate addition to the

price that their customers were legally obligated to pay

within a certain time.” 468 U.S. at 277-278. In contrast

here, the State persuaded the lower court to disregard

the practical effect on passengers of the exaction of

GET on Petitioners’ gross earnings. The State may not

have it both ways. The ICA acknowledged the tax is

passed through to otherwise tax exempt passengers

through higher fares. For purposes of § 5(b), there can

be no distinction between collection of the tax from the

passenger at the moment the fare is paid and collection

from the vessel operator on receipt of the fare. In each

instance the exaction increases the fares ultimately

paid by passengers.

The effect on vessel and passenger of the

exaction of the GET at issue is even more direct. The

tax is imposed on vessel owner based on the earnings of

an exempt vessel. '' The singular source of those

'' The effect of Haw.Rev.Stat. § 287-41.5 is to render Petitioners

collection agents. It allows the State to accomplish through

chapter 237 what § 5(b) expressly prohibits - - taxation of

earnings is the fares paid by tax exempt passengers

who ultimately bear the financial burden of the tax.

Hvoslef disavowed taxation of a_ transaction § in

contemplation of exportation. Here, exaction of GET

on the fares paid by passengers is, as this Court

recognized in Aloha Airlines, at best indirect taxation

of the gross receipts of a_ transaction involving

transportation - - fares paid by tax exempt passengers

for transportation aboard a tax exempt vessel. This

result, permissible only by reading the term “vessel” to

exclude its owner and operator, is inconsistent with this

Court’s historic approach to questions of preemption in

the maritime context. Historically, the answer would

turn on the effect of the exaction, not its label.

A common theme thus underlies the Commerce

and Tonnage Clauses and section 445 - - states should

not be allowed to exploit their proximity to navigable

waterways, whether to the detriment of those residing

in or visiting from neighboring states. In enacting

section 445 Congress intended to clarify - - not curtail -

- existing federal law relating to the taxation of vessels

and their passengers. This body of law views

instruments of maritime commerce as embodying

vessel owner and operator, and the exemption of

passengers from local taxation as foreclosing their

taxation indirectly through taxation of the vessel

operator. See State, Dept. of Natural Res. v. Alaska

Riverways, .. 232 P.38d 1203, 1222 (Alaska 2010) (State

agency violated § 5(b) by charging tour boat operator

$0.25 per passenger carried as rent for use of

unimproved state-owned — shore _ lands: “DNR’s

passengers and the gross earnings of the tax exempt vessels that

carry them.

proposed assessment on Alaska Riverways, however

labeled, is a charge exacted specifically for the use of

navigable waters--in this case, $0.25 for each paying

passenger--and therefore applies.”).

The point is underscored by § 5(b)’s exception

for tonnage duties under 33 U.S.C. § 2236. That statute

confers on any party who suffers “legal wrong or is

adversely affected or aggrieved by the imposition of

port or harbor dues” standing to sue in district court.

Id. at (b)2-(b)8. Congress in providing a federal forum

recognized that the practical effect of wrongful levies

would not be limited to vessels, but would aggrieve

their owners and operators. It is thus inconceivable

that Congress in exempting vessels from taxation

would expect their owners to be taxed based on the

value of the exempt vessel or the gross value of the

fares paid by exempt passengers.

Congressional efforts to clarify the preemptive

scope of § 5(b) support reading the term “vessel” to

encompass its earnings. As noted, the conference

committee understood the ban on taxation of vessels

would be read as precluding their taxation as property.

Liability for such taxes Is personal; 1.e., it is a burden of

ownership. Taxing authorities look to the owner, not

the property itself, for payment. If the term “vessel”

excluded their owners, as the ICA believed, the

amendment to allow taxation of vessels as property

would have been an idle act; vessel owners were

unaffected by the exemption of their vessels from

taxation. Petitioners submit in restoring the power to

tax vessels as property there was no need to state the

obvious - - that the exemption from property taxes

would extend to vessel owners as the party responsible

for their payment.

‘In sum, the lower court’s literal reading of

“vessel” and “passenger” was the product of

misapplication of the presumption against pre-emption,

misreading of legislative intent, and manifest disregard

of historical backdrop. Section 5(b) expressly pre-

empts use of the earnings of a tax exempt vessel from

fares paid by tax exempt passengers to determine a

vessel owner’s liability for a state’s occupational

privilege tax.

b. Implied Preemption

While unnecessary to decision in this case, it is

clear that § 5(b) impliedly pre-empts assessment of

GET based on passenger fares. Roth types of implied

preemption are present: field and conflict. Geier v.

American Honda Co., 529 U.S. 861, 874, 120 S.Ct. 19138,

1922. The field Congress occupied in enacting § 5(b) is

unmistakable. The statute prohibits taxation of vessels

operating on navigable waters or the passengers they

carry, except for harbor dues, reasonable fees for

services actually rendered and property taxes. This

leaves no room for the excise taxes protested by

Petitioners. Taxation of vessel earnings resulting from

passenger fares, irrespective of how they are labeled,

encroaches on a _ field occupied by the _ federal

government and is thus preempted. See Franklin Nat'l

Bank v. New York, 347 U.S. 373, 375-376 (1954)

(“However wise or needful New York’s policy, a matter

as to which we express no judgment, it must give way

to the contrary federal policy”).

Present also is actual conflict between state and

federal law. First, § 5(b) prohibits any “non-federal

interest” from imposing any taxes, tolls or operating

charges on exempt passengers, yet state law renders

Petitioners’ owner personally liable for such taxes if

they are not passed through to their passengers. The

risk of personal liability may be avoided by adding GET

to passenger fares and holding the amount collected in

trust for the benent of the state. The resulting conflict

is palpable. State law allows Petitioners to collect GET

from their passengers as cost recovery, yet they violate

§ 5(b) by adding the taxes to passenger fares. It is no

answer to say Petitioners are not compelled to pass on

this cost. For purposes of pre-emption it suffices that

the taxes at issue are measured by the charter fares

passengers are required to pay.

Taxation of the owners based on the earnings of

tax exempt vessels also creates an obstacle to uniform

federal regulation of maritime commerce, a primary

reason for adoption of the Constitution. l/nited States

v. Locke, 529 U.S. at 99, 120 S.Ct. at 11438. Long ago the

Supreme Court recognized the paramount power of

Congress “to prescribe the rules by which [maritime

commerce] shall be governed, that is, the conditions

upon which it shall be conducted; to determine when it

shall be free, and when subject to duties or other

exactions.” Gloucester Ferry Co., 114 U.S. at 203-204.

This Court has routinely held that the power to

exercise control over and to regulate the navigable

waterways of the United States rests squarely with

Congress. Gibson v. United States, 166 U.S. 269, 17 S.

Ct 578, 41 L. Ed. 996 (1897) (holding that all navigable

waters are under control of United States for purpose

of regulating and improving navigation); Leovy v.

United States, 177 U.S. 621, 20S Ct. 797, 44 L. Ed. 914

(1900) (finding that power of Congress to regulate

navigable waters, while not expressly granted in the

Constitution, “is a power incidental to express power to

regulate commerce with foreign nations, among the

states, and with Indian Tribes”). “(T]he smooth flow of

maritime commerce is promoted when all vessel

operators are subject to the same duties and liabilities. .

..” Foremost Ins. Co. v. Richardson, 457 U.S. 668, 676,

102 S.Ct. 2654, 2659 (holding that federal maritime law

pre-empts application of state law which imposes a

greater sanction or liability on vessel owners than that

imposed by federal law). Allowing Hawari to tax

owner-operators clearly obstructs the geal of Congress

in exempting vessels and passengers from _ local

taxation.

CONCLUSION

Respondents again apply Hawaii's tax laws to

reach earnings Congress has expressly exempted from

local taxation. Doing so affects hundreds of business

operating tax exempt vessels and hundreds of

thousands of passengers who themselves are exempt

from taxation. While Respondents may levy a privilege

tax on Petitioners, § 5(b) does not allow such tax to be

measured by the earnings of tax exempt vessels or the

charter fares paid by tax exempt passengers.

The issue is squarely presented and worthy of

this Court’s review. It is respectfully submitted that

the petition should be granted so that the Court may

answer the question presented.

Respectfully submitted,

DENNIS NILES

Counsel of Record

ELIZABETH BREY

Paul, Johnson, Park & Niles

2145 Kaohu Street

Suite 208

Wailuku, HI 967938

DNiles@pjpn.com

(808) 242-6644

NO. 29598

SUPREME COURT OF HAWAI'I

IN THE MATTER OF THE TAX APPEAL OF

REEL HOOKER SPORTFISHING, INC.,

Plaintiff-Appellant

STATE OF HAWAI'I, DEPARTMENT OF

TAXATION,

Defendant-Appellee,

and

EXACT GAME FISHING, INC.,

Plaintiff-Appellant

STATE OF HAWAI'T, DEPARTMENT OF

TAXATION,

Defendant-Appellee,

and

FINEST KIND, INC.,

Plaintiff-A ppellant

STATE OF HAWAI'T, DEPARTMENT OF

TAXATION, Reel Hooker Sportfishing

Defendant-Appellee

October 19, 2010, Decided

CERTIORARI TO THE INTERMEDIATE COURT

OF APPEALS. CASE NOS. 07-0072, 07-0073, AND 07-

0074.

By: Duffy, J., for the court’

ORDER REJECTING APPLICATION FOR WRIT

OF CERTIORARI

Petitioners/Plaintiffs-Appellants Reel Hooker

Sportfishing, Inc., Exact Game Fishing, Inc., and Finest

Kind, Inc.'s application for writ of certiorari, filed on

September 7, 2010, is hereby rejected.

DATED: Honolulu, Hawai'i, October 19, 2010.

FOR THE COURT:

/s/ James E. Duffy, Jr.

Associate Justice

Footnote

1Considered by: Recktenwald, C.J., Nakayama, Acoba,

and Duffy, JJ. and Circuit Judge Kim, assigned by

reason of vacancy.

NO. 29598

INTERMEDIATE COURT OF APPEALS

OF HAWAI'I

IN THE MATTER OF THE TAX APPEAL OF

REEL HOOKER SPORTFISHING, INC.,

Plaintiff-Appellant

STATE OF HAWAI'I, DEPARTMENT OF

TAXATION,

Defendant-Appellee,

and

EXACT GAME FISHING, INC.,

Plaintiff-Appellant

STATE OF HAWAI'I, DEPARTMENT OF

TAXATION,

Defendant-Appellee,

and

FINEST KIND, INC.,

Plaintiff-Appellant

STATE OF HAWAI'I, DEPARTMENT OF

TAXATION, Reel Hooker Sportfishing

Defendant-Appellee

May 28, 2010, Decided

May 28, 2010, Filed

APPEAL FROM THE TAX APPEAL COURT. CASE

NOS. 07-0072, 07-0073 and 07-0074.

JUDGMENT ON APPEAL

(By: Leonard, J., for the court)’

Pursuant to the Opinion of the Intermediate Court of

Appeals of the State of Hawai’l entered on May 28,

2010, the Hawai’i Tax Appeal Court’s December 22,

2008 Consolidated Judgment is affirmed. Judgment is

hereby entered on this appeal.

DATED: Honolulu, Hawai’i, August 31, 2010

HK ootnote

lFoley, Presiding Judge, Fujise and Leonard, JJ.

NO. 29598

INTERMEDIATE COURT OF APPEALS

OF HAWAT'I

IN THE MATTER OF THE TAX APPEAL OF

REEL HOOKER SPORTFISHING, INC.,

Plaintiff-Appellant

Vv.

STATE OF HAWAI'l, DEPARTMENT OF

TAXATION,

Defendant-Appellee,

and

EXACT GAME FISHING, INC.,

Plaintiff-Appellant

STATE OF HAWAI'I, DEPARTMENT OF

TAXATION,

Defendant-Appellee,

and

FINEST KIND, INC.,

Plaintiff-Appellant

STATE OF HAWAI'I, DEPARTMENT OF

TAXATION, Reel Hooker Sportfishing

Defendant-Appellee

May 28, 2010, Decided

May 28, 2010, Filed

APPEAL FROM THE TAX APPEAL COURT. CASE

NOS. 07-0072, 07-0073 and 07-0074.

COUNSEL: Dennis Niles, (Shannon S. Imlay and

Ronald N.W. Kim with him on the briefs), (aul

Johnson Park & Niles), for Plaintiffs-Appellants.

Damien A. Elefante, Deputy Attorney General (Hugh

Rk. Jones, Deputy Attorney General, with him on the

brief, for Appellee, STATE OF HAWAI'I,

DEPARTMENT OF TAXATION.

FOLEY, PRESIDING JUDGE, FUJISK AND

LEONARD, JJ.

OPINION OF THE COURT BY LEONARD, J.

This is a tax appeal case in which the taxpayers, who

are in the charter boat fishing business, challenge the

assessment of Hawai'i General Excise Tax (GIT) on

their businesses on the ground that a federal statute

limiting non-federal taxes upon vessels operating in

U.S. navigable waters, 88 United States Code (U.S.C.)

§ 5(b) (2006), preempts the application of the Hawai'i

GET statute, Hawaii Revised Statutes (HRS) § 237-

13(6)(A) (2001 & Supp. 2008), to their charter fishing

revenue. Plaintiffs-Appellants Reel Hooker

Sportfishing, Inc., Exact Game Fishing, Inc., and Finest

Kind, Inc. (collectively Taxpayers) appeal from the

Consolidated Judgment entered on December 22, 2008

(Judgment), by the Hawai'i ‘Tax Appeal Court (‘Tax

Appeal Court),' which entered Judgment against

Taxpayers and in favor of Defendants-Appellees

Director of Taxation, State of Hawai, and Department

of Taxation, State of Hawai'i (State). We hold that 33

U.S.C. § 5(b) does not preempt the assessment of

Hawai'i GET on the charter fishing revenue of these

Hawai'i businesses because GET is a tax assessed on

gross business receipts for the privilege of doing

business in Hawai'i, and is not a tax on their vessels or

passengers.

I. BACKGROUND

Taxpayers are Hawai'i corporations, incorporated

under and in accordance with the laws of the State of

Hawar'i. Taxpayers own and operate three passenger

vessels that are licensed by the federal government to

carry up to six passengers in the "coastwise" trade. The

coastwise endorsement entitles the vessels to

unrestricted access to the navigable’ waters

surrounding the islands of Maui, Lanai and Molokai.

Taxpayers are in the charter fishing business,

providing customers with the opportunity to fish for

various species of pelagic game fish, including marlin,

tuna, ono (wahoo), and mahimahi. The fishing

excursions originate at Maui's Lahaina Harbor.

The principal source of Taxpayers’ earnings is the fares

paid by their charter passengers. Since beginning

operations decades ago, Taxpayers have added GET to

the charter fares collected from their passengers, which

is consistent with the practice in the charter fishing

industry.

On or about June 22, 2007, Taxpayers each filed a

complaint against the State in the Tax Appeal Court,

seeking relief from GET assessments for tax years 2004

and 2005. In their complaints, Taxpayers requested

refunds for amounts paid under protest pursuant to

HRS § 40-35 (1993), claiming that the State improperly

imposed GET under HRS § 237-13(6)(A)? because it is

preempted by 33 U.S.C. § 5(b).!

On October 22, 2007, the Tax Appeal Court entered a

stipulation and order consolidating Taxpayers’ three

cases under Tax Appeal Case No. 07-0072. Taxpayers

subsequently filed a first amended complaint on

December 24, 2007. In response, the State filed a

consolidated answer on January 3, 2008.

The Tax Appeal Court heard the parties' cross-motions

for summary judgment on November 3, 2008. On

December 22, 2008, the Tax Appeal Court entered

orders granting summary judgment to the State and

denying the Taxpayers’ motions. Final judgment also

was entered. On January 21, 2009, Taxpayers timely

filed a notice of appeal.

Il. POINTS OF ERROR

On appeal, Taxpayers contend that the Tax Appeal

Court erred because it: (1) looked beyond 33 U.S.C. §

d(b)'s plain, unambiguous and explicit prohibition of

state taxation of the earnings on Taxpayers’ vessels; (2)

construed 33 U.S.C. § 5(b) to allow assessment of GET

on the charter revenue of Taxpayers' vessels

notwithstanding a resulting direct conflict with the

federal law; and (3) construed 33 U.S.C. § 5(b) to allow a

privilege tax on Taxpayers’ business of transporting

passengers to and from a state boat harbor.

Ill. APPLICABLE STANDARD OF REVIEW

"We review the circuit court's grant or denial of

summary judgment de novo." Querubin v. Thronas, 107

Hawai'i 48, 56, 109 P.3d 689, 697 (2005) (quoting Durette

v. Aloha Plastic Recycling, Inc., 105 Hawai'i 490, 501,

100 P.38d 60, 71 (2004)). Likewise, the meaning of a

statute is a question of law that is reviewed de novo.

See, e.g., Sierra Club v. Dep't of Transp. of State of

Hawai'i, 120 Hawai'l 181, 197, 202 P.38d 1226, 1242

(2009).

IV. DISCUSSION

The dispositive issue in this tax appeal is whether HRS

§ 237-13(6)(A) is preempted by the Marine

Transportation Security Act of 2002, codified at 33

U.S.C. § 5(b). A state law is preempted by federal law

when there is (1) express preemption or (2) implied

preemption.

Express preemption exists when Congress makes its

intent known through explicit statutory language

preempting state action in a given area. See, e.g.,

English v. Gen. Elec. Co., 496 US. 72, 79, 110 S. Ct.

2270, 110 L. Ed. 2d 65 (1990); Wardair Canada, Inc. v.

Florida Dep't of Revenue, 477 U.S. 1, 6, 106 S. Ct. 2369,

91 L. Ed. 2d 1 (1986). When the text of an express

preemption clause is susceptible to multiple

interpretations, courts generally accept the reading

that disfavors preemption. Bates v. Dow Agrosciences

LLC, 544 U.S. 4381, 449, 125 S. Ct. 1788, 161 L. Ed. 2d

687 (2005).

Implied preemption occurs when there is either (1)

conflict preemption or (2) field preemption. A state law

is preempted under the conflict preemption doctrine

when it is impossible to comply with both the state and

federal laws, or when the state law impedes the

objectives of the federal law. Gade v. Nat'l Solid Wastes

Mgmt. Ass'n, 505 U.S. 88, 98, 112 S. Ct. 2374, 120 L. Ed.

2d 73 (1992). Field preemption occurs when the federal

10a

legislative scheme is so pervasive that it occupies the

field, leaving r. room for states to supplement federal

law. /d. at 98, 115.

The United States Supreme Court has held that the

burden of establishing preemption rests with the party

who is seeking the benefit of it. De Buono v. NYSA-

ILA Med. and Clinical Servs. Fund, 520 U.S. 806, 814,

1178S. Ct. 1747, 188 L. Ed. 2d 21 (1997). That party must

therefore "bear the considerable burden of overcoming

the starting presumption that Congress does not intend

to supplant state law." /d. Thus, preemption is

disfavored unless the "nature of the regulated subject

matter permits no other conclusion" or "Congress has

unmistakably so ordained." Florida Lime & Avocado

Growers, Inc. v. Paul, 373 U.S. 182, 142, 838 8. Ct. 1210,

10 L. Ed. 2d 248 (1963).

In analyzing whether a state law is preempted, the

"purpose of Congress is the ultimate touchstone." Fetail

Clerks Intern. Ass'n., local 1625, AFL-CIO. »v.

Schermerhorn, 375 U.S. 96, 103, 84 S. Ct. 219, 11 L. Ed.

2d 179 (1963). The purpose of Congress can be

"explicitly stated in the statute's language, or implicitly

contained in its structure and purpose." Jones v. Rath

Packing Co., 430 U.S. 519, 525, 97S. Ct. 13805, 51 L. Ed.

2d 604 (1977).

A. Hawai'i GET

Pursuant to HRS § 237-13(6)(A), GET is levied,

assessed, and collected upon "every person engaging or

continuing within the State in any service business or

calling including professional services not otherwise

specifically taxed," which indisputably — includes

lla

Taxpayers' gross income from their charter fishing

business. GET is a tax on gross income or gross

receipts. See HRS § 237-3 (2001). The Hawai'i Supreme

Court has described GET as a tax on the privilege of

doing business in the State.

Hawai'l's general excise tax is a gross receipts

tax on the privilege of doing business in Hawai'i,

thus Hawai'l's general excise tax is a privilege

tax....A privilege tax is assessed a party based

on the fact that the party chose to engage in

business activity within the state. Such a tax is

justified on the ground that companies

conducting business enjoy the protections and

benefits given by the state.

ln re Tax Appeal of Baker & Taylor, Inc. v. Kawafuchi,

103 Hawai'i 359, 365, 82 P.38d 804, 810 (2004) (citations

and footnote omitted; format altered).

B. Express Preemption

Taxpayers argue that 33 U.S.C. §$ 5(b) expressly

preempts the imposition of GET on the earnings of

their vessels, emphasizing the statutory language as

follows: "No taxes . . . shall be levied upon or collected

from any vessel... or from its passengers ... by any

non-federal interest," if the vessel is operating on any

navigable waters of the United States.

The Supreme Court has emphasized that the plain

language of federal laws must be narrowly construed

because of the presumption against preemption.

Cipollone v. Liggett Group, Inc., 505 U.S. 504, 505, 112

S. Ct. 2608, 120 L. Ed. 2d 407 (1992). In this ease, the

12a

plain language of 33 U.S.C. § 5(b) prevents anyone

except the federal government from imposing a tax ona

vessel or on its passengers or crew, while that vessel is

operating on navigable waters. In contrast, HRS § 237-

13(6) (A) requires Hawai'i businesses to pay a privilege

tax for engaging and conducting business in the State of

Hawai. Contrary to Taxpayers’ assertion, the express

language of 33 U.S.C. § 5(b) does not explicitly prohibit

a state from taxing a corporation's gross income for

engaging in business in that state. The federal statute

refers only to vessels and their passengers and crews,

and simply does not address the business revenue or

gross Income generated by a business that operates the

vessel.

Indeed, the case cited by Taxpayers as "illustrative" of

their express preemption argument in fact undercuts it.

In Aloha Airlines, Inc. v. Director of Taxation of

Hawai, 464 U.S. 7, 104 8S. Ct. 291, 78 L. Ed. 2d 10

(1983), the Supreme Court found that the explicit

language of 49 U.S.C. § 1513(a) preempted taxes levied

and assessed upon the gross income of an airline

pursuant to HRS § 239-6 (1970).° As noted in Aloha

Airlines, 49 U.S.C. § 1513(a) expressly states that "no

State ... shall levy a tax ...on persons traveling in air

commerce or on the sale of air transportation or on the

gross receipts derived therefrom." 464 U.S. at 11

(emphasis added). The Court found that HRS § 239-6

was expressly preempted because it imposes a state tax

on the gross receipts of airlines selling air

transportation and carrying persons traveling in air

commerce. Id. The statute at issue in Aloha Airlines

plainly differs from the statute at issue in this case

because the explicit language of 38 U.S.C. § 5(b) does

not prohibit a state from imposing a tax on the gross

13a

income of businesses within that state. Since Congress

has not explicitly and unambiguously prohibited states

from imposing taxes on the gross income of businesses

in 33 U.S.C. § 5(b), there is no express preemption

through its statutory language. As argued by the State,

if Congress had intended in 33 U.S.C. § 5(b) to preempt

states from imposing taxes on the gross income or gross

receipts derived from commerce over navigable waters,

it could have so stated, as was done in 49 U.S.C. §

1513(a).

Inherent in Taxpayers' express preemption argument

is the contention that any tax on the gross receipts

received by Taxpayers for carrying passengers aboard

their vessels is in fact a tax on the vessel and passenger

alike. This proposition is simply not supported by the

authorities relied on by the Taxpayers nor any others

that have been considered by this court. See, e.g.,

Gloucester Ferry Co. v. Penn., 114 U.S. 196, 5 S. Ct.

826, 29 L. Ed. 158 (1885) (cited by Taxpayers)

(rejecting, as an interference with interstate commerce,

Pennsylvania's attempt to tax dividends of a New

Jersey ferry company that merely loaded and unloaded

passengers and freight at a Philadelphia dock).

Particularly in lght of strong presumption against

preemption, we decline to broadly construe the term

"vessel" to include the gross income generated by a

taxpayer's use of its vessel.

Thus, we reject Taxpayers' argument that 33 U.S.C. §

5(b) expressly preempts the assessment of GET.

C. Implied Preemption

1. Conflict Preemption

l4a

Taxpayers contend that HRS § 287-13(6)(A) is

impliedly preempted because it is in direct conflict with

33 U.S.C. § 5(b). Specifically, Taxpayers argue that

"state law is violated if Taxpayers do not pay the [GET]

tax, yet if they do so, they violate federal law by

collecting it on behalf of the state."

First, this is a faulty premise. For better or worse,

HRS § 237-13(6)(A) requires only that businesses pay

GET to the State, it does not require that businesses

collect this tax from their customers. While collection of

the GET from customers and clients is a common,

arguably uniform, practice that is not prohibited by

Hawai'i law, the GET is a privilege tax on the business,

not its customer. The fact that Taxpayers fund their

payment of the GET through a pass-through charge to

their customers/passengers does not change the nature

of the GET from a tax on their businesses to a tax on

their passengers.

Taxpayers also argue that the imposition of GET on

their charter fishing business impedes the objectives of

the federal law and, therefore, is barred by the conflict

preemption doctrine. Taxpayers contend that the

purpose of 33 U.S.C. § 5(b) was to decrease the financial

burden on vessel operators and their passengers by

exempting them from state and local taxes that

interfere with interstate commerce by mandating a

broad prohibition against state and local taxation. The

legislative history suggests a more targeted concern

and more narrow legislative solution. The U.S. House

Conference Report states that the purpose of 33 U.S.C.

§ 5(b) was "to clarify existing law with respect to

Constitutionally permitted fees and taxes on a vessel,"

and "to prohibit fees and taxes on a vessel simply

15a

because that vessel] sails through a given jurisdiction."

H.R. Rep. No. 108-334, at 180 (2002) (Conf. Rep.)

(emphasis added). The Report also notes that the

amendment did "not affect whether sales or income

taxes are applicable with respect to vessels." Id.

Indeed, a sponsor of the bill that was codified as 33

U.S.C. § 5(b) explained the purpose of the legislation as

follows:

{The proposed legislation] addresses the current

problem, and the potential for greater future

problems, of local jurisdictions seeking to impose

taxes and fees on vessels merely transiting or

making innocent passage through navigable

waters subject to the authority of the United

States that are adjacent to the taxing

community. We are seeing instances in which

local communities are seeking to impose taxes or

fees on vessels even where the vessel is not

calling on, or landing, in the local community.

These are cases where no passengers are

disembarking, in the case of passenger vessels,

or no cargo is being unloaded in the case of cargo

vessels and where the vessels are not stopping

for the purpose of receiving any other service

offered by the port. In most instances, these

types of taxes would not be allowed under the

Commerce Clause of the United States

Constitution. Unfortunately, without a statutory

clarification, the only means to determine

whether the burden is an impermissible burden

under the Constitution is to pursue years of

litigation.

148 Cong. Rec. E2143-04 (2002).

16a

Taxpayers and Amicus Curiae Paradise Cruise,

Limited, dba Star of Honolulu Cruises & Events

(Amicus Curiae) also ask this court to consider an

unpublished Tennessee decision concluding that 33

U.S.C. § 5(b) preempted a Tennessee privilege tax law.

Upon review, however, the statute at issue in High

County Adventures, Inc. v. Polk County, No. E2007-

02678-COA-R3-CV, 2008 Tenn. App. LEXIS 651, 2008

WL 4853105 (Tenn. Ct. App., November 10, 2008),

levied a privilege tax upon consumers participating in

commercial whitewater rafting excursions, not upon the

rafting businesses, although the businesses were tasked

with collecting the tax from their

customers/passengers. The Tennessee court, noting the

lack of any explicit preemption language in 33 U.S.C. §

5(b), held that there was a manifest and irreconcilable

conflict between Polk County's privilege tax on

consumers participating in rafting excursions on

navigable waters and the federal law. 2008 Tenn. App.

LEXIS 651, [WL] at *12-13.° As Taxpayers, in their

role as Hawai'l businesses, and not their boating

customers/passengers, are taxed pursuant to HRS §

237-13(6)(A), the ‘Tennessee court's rationale is

inapplicable to this case.

2. Field Preemption

Taxpayers argue that taxation of the earnings from

their vessels pursuant to HRS § 237-13(6)(A) creates an

obstacle to uniform federal regulation of maritime

commerce and Amicus Curiae argues that federal law

so fully occupies the legislative field that the GET is

impliedly preempted. While we recognize the broad

scope of federal maritime legislation, we fail to see how

the imposition of GET on the gross receipts of

17a

Taxpayers’ charter fishing businesses interferes in any

way with the uniform federal regulation of maritime

commerce. Accordingly, we reject the argument that

the doctrine of field preemption is applicable to this

case.

V. CONCLUSION

For the foregoing reasons, the Circuit Court's

December 22, 2008 Judgment is affirmed.

DATED: Honolulu, Hawai'i, May 28, 2010.

/s/ Daniel R. Foley

Presiding Judge

/s/ Alexa D.M. Fujise

Associate Judge

/s/ Katherine G. Leonard

Associate Judge

Footnotes

1The Honorable Gary W.B. Chang presided.

2Taxpayers also seek relief from the following orders,

also entered on December 22, 2008: (1) Order Granting

Director of Taxation, State of Hawai'i and Department

of Taxation, State of Hawai'i's Motion for Summary

Judgment Filed October 10, 2008; (2) Order Denying

Reel Hooker Sportfishing, Inc.'s Motion for Summary

Judgment on First Amended Complaint to Recover

Monies Paid Under Protest Pursuant to HRS § 40-35

Filed August 26, 2008; (3) Order Denying Exact Game

18a

Fishing, Inc.'s Motion for Summary Judgment on First

Amended Complaint to Recover Monies

Paid Under Protest Pursuant to HRS § 40-35 Filed .

August 21, 2008; and (4) Order Denying Finest Kind,

Inc.'s Motion for Summary Judgment on _ First

Amended Complaint to Recover Monies Paid Under

Protest Pursuant to HRS § 40-35 Filed August 26, 2008.

3HRS § 237-13(6)(A) (2001) provides:

Upon every person engaging or continuing

within the State in any service business or

calling including professional services not

otherwise specifically taxed under this chapter,

there is likewise hereby levied and shall be

assessed and collected a tax equal to four percent

of the gross income of the business, and in the

case of a wholesaler under seetion 237-4(a)(10),

the tax shall be equal to one-half of one percent

of the gross income of the _ business.

Notwithstanding the foregoing, a wholesaler

under section 2387-4(a)(10) shall be subject to

section 237-13.3.

433 U.S.C. § 5(b) provides:

No taxes, tolls, operating charges, fees, or any

other impositions whatever shall be levied upon

or collected from any vessel or other water craft,

or from its passengers or crew, by any non-

Federal interest, if the vessel or water craft is

operating on any navigable waters subject to the

authority of the United States, or [*5] under

the right to freedom of navigation on those

19a

waters, except for (1) fees charged under section

2236 of this title; (2) reasonable fees charged on a

fair and equitable basis that (A) are used solely

to pay the cost of a service to the vessel or water

craft; (B) enhance the safety and efficiency of

interstate and foreign commerce; and (C) do not

impose more than a small burden on interstate or

foreign commerce; or (3) property taxes on

vessels or watercraft, other than vessels or

watercraft that are primarily engaged in foreign

commerce if those taxes are permissible under

the United States Constitution.

oDuring the relevant period, HRS § 239-6 provided, in

part:

Airlines, certain carriers. There shall be levied

and assessed upon each airline a tax of four per

cent of its gross income each year from the

airline business; provided that if an airline

adopts a rate schedule for students in grade

twelve or below traveling in school groups

providing such students at reasonable hours a

rate less than one-half of the regular adult fare,

the tax shall be three per cent of its gross income

each year from the airline business.

6We are also unpersuaded by the August 30, 2005 order

issued by a trial court in Pennsylvania, 2.e., the Court of

Common Pleas of Fayette County, Pennsylvania (No.

220 of 2005, G.D.), that was provided by Amicus Curiae.

In contrast to our analysis here, the Pennsylvania court

summarily construed its statute as levying a tax on the

use of the river. As discussed above, Hawai'l courts

have long held GET to be a privilege tax on businesses,

2U0a

for the privilege of doing business in Hawai'i, without

regard to the nature of the business. Thus, we reject

the notion that Taxpayers are being taxed simply for

their use of Hawai'l's navigable waters.

2la

Filed 12/22/2008

Consolidated

CASE NO. 07-0072

CASE NO. 07-0073

CASE NO. 07-0074

IN THE TAX APPEAL COURT

OF THE STATE OF HAWAII

REEL HOOKER SPORTFISHING, INC.

Plaintiff,

VS.

DEPARTMENT OF TAXATION, STATE OF

HAWAII; KURT K. KAWAFUCHL, in his capacity as

DIRECTOR OF TAXATION, STATE OF HAWATI,

Defendants.

EXACT GAME FISHING, INC.

Plaintiff,

”.

DEPARTMENT OF TAXATION, STATE OF

HAWAII; KURT K. KAWAFUCHI, in his capacity as

DIRECTOR OF TAXATION, STATE OF HAWATI,

Defendants.

FINEST KIND, INC.

Plaintiff,

99.

Zia

DEPARTMENT OF TAXATION, STATE HAWAII;

KURT K. KAWAFUCHL, in his capacity as a

DIRECTOR OF TAXATION, STATE OF HAWAII,

Defendants.

JUDGMENT

IT IS HEREBY ORDERED, ADJUDGED, AND

DECREED that in accordance with Rule 29 of the Tax

Appeal Court and Rule 58 of the Hawaii Rules of Civil

Procedure and pursuant to the following orders:

l. ORDER GRANTING DIRECTOR OF

TAXATION, STATE OF HAWAII AND

DEPARTMENT OF TAXATION, STATE OF

HAWAII'S MOTION FOR SUMMARY JUDGMENT

FILED OCTOBER 10, 2008;

2. ORDER DENYING REEL HOOKER

SPORTFISHING, INC.'S MOTION FOR SUMMARY

JUDGMENT ON FIRST AMENDED COMPLAINT

TO RECOVER MONIES PAID UNDER PROTEST

PURSUANT TO HRS § 40-3 FILED AUGUST

26,2008;

3. ORDER DENYING EXACT GAME FISHING,

IND.'S MOTION FOR SUMMARY JUDGMENT ON

FIRST AMENDED COMPLAINT TO RECOVER

MONIES PAID UNDER PROTEST PURSUANT TO

HRS § 40-35 FILED AUGUST 21, 2008; and

4. ORDER DENYING FINEST KIND, INC.'S

MOTION FOR SUMMARY JUDGMENT ON FIRST

AMENDED COMPLAINT TO RECOVER MONIES

92.

aod

PAID UNDER PROTEST PURSUANT TO HRS § 40-

3 FILED AUGUST 20, 2008.

JUDGMENT IS HEREBY entered in favor of

Defendants DIRECTOR OF TAXATION, STATE OF

HAWAII and DEPARTMENT OF TAXATION,

STATE OF HAWAII and against Plaintiffs REEL

HOOKER SPORTFISHING, INC., EXACT GAME

FISHING, INC., and FINEST KIND, INC.

(collectively, "'Plaintiffs") upon all claims stated in their

First Amended Complaint to Recover Monies Paid

Under Protect Pursuant to HRS § 40-5 filed on

December 4, 2007 ("First Amended Complaint").

At the time of the filing of the First Amended

Complaint, the respective general excise tax liabilities

for the Plaintiffs were as follows:

Plaintiff Period | General Excise

ae | Tax Liability

| Reel Hooker

Sportfishing, |

Inc. | 2004 _ $12,065.10 |

2005, S $14,353.16 |

Exact Game |

Fishing, Inc. | 2004 $8460.07

| 2005 $11,446.15

Finest Kind, | FY E 8/2004 $7,844.79

| Inc. +A |

| FYE 8/2005 | —_—- $15,126.02

—

Plaintiffs are lable far the above-stated amounts

including applicable interest as provided by law.

24a

This final judgment disposes of all claims and all parties

in this action.

20a

Filed 12/22/2008

Consolidated

CASE NO. 07-0072

CASE NO. 07-0073

CASE NO. 07-0074

IN THE TAX APPEAL COURT

OF THE STATE OF HAWAII

REEL HOOKER SPORTFISHING, INC.

Plaintiff,

VS.

DEPARTMENT OF TAXATION, STATE OF

HAWAII; KURT K. KAWAFUCHL, in his capacity as

DIRECTOR OF TAXATION, STATE OF HAWAITI,

Defendants.

EXACT GAME FISHING, INC.

Plaintiff,

DEPARTMENT OF TAXATION, STATE OF

HAWAII; KURT K. KAWAFUCHL, in his capacity as

DIRECTOR OF TAXATION, STATE OF HAWAII,

Defendants.

FINEST KIND, INC.

Plaintiff,

26a

DEPARTMENT OF TAXATION, STATE HAWAITI;

KURT K. KAWAFUCHL, in his capacity as a

DIRECTOR OF TAXATION, STATE OF HAWAII,

Defendants.

ORDER GRANTING DIRECTOR OF TAXATION,

STATE OF HAWAII AND DEPARTMENT OF

TAXATION, STATE OF HAWAII'S MOTION FOR

SUMMARY JUDGMENT FILED OCTOBER 10, 2008

Defendants DIRECTOR OF TAXATION, STATE OF

HAWAII and DEPARTMENT OF TAXATION,

STATE OF HAWAII's (collectively "Department”")

Motion for Summary Judgment filed on October 10,

2008 ("Motion") came on for hearing on Monday,

November 3, 2008 at 9:00 a.m. before the Honorable

Gary W.S. Chang. Damien A. Elefante, Deputy

Attorney General, appeared on behalf of the

Department and Dennis Niles, Esq., appeared on behalf

of Plaintiffs REEL HOOKERSPORTFISHING, INC.,

EXACT GAME FISHING, INC., and FINEST KIND,

INC. (collectively "Taxpayers"). The Court, having

considered the record and pleadings herein, the Motion,

memoranda, and arguments presented at the hearing,

and the Court having been fully advised in the premises

and good cause appearing therefore,

ACCORDINGLY, IT IS HEREBY ADJUDGED,

ORDERED, AND DECREED that the Department's

Motion for Summary Judgment filed on October 10,

2008 is hereby GRANTED for the reasons stated at the

November 8, 2008 hearing.

21a

Filed 12/22/2008

Consolidated

CASE NO. 07-0072

CASE NO. 07-0073

CASE NO. 07-0074

IN THE TAX APPEAL COURT

OF THE STATE OF HAWAII

REEL HOOKER SPORTFISHING, INC.

| Plaintiff,

VS.

DEPARTMENT OF TAXATION, STATE OF

HAWAII; KURT K. KAWAFUCHL, in his capacity as

DIRECTOR OF TAXATION, STATE OF HAWATI,

Defendants.

EXACT GAME FISHING, INC.

Plaintiff,

DEPARTMENT OF TAXATION, STATE OF

HAWAITI; KURT K. KAWAF'UCHL, in his capacity as

DIRECTOR OF TAXATION, STATE OF HAWATI,

Defendants.

FINEST KIND, INC.

Plaintiff,

28a

DEPARTMENT OF TAXATION, STATE HAWATI;

KURT K. KAWAFUCHL, in his capacity as a

DIRECTOR OF TAXATION, STATE OF HAWAII,

Defendants.

ORDER DENYING EXACT GAME FISHING,

INC.'S MOTION FOR SUMMARY JUDGMENT ON

FIRST AMENDED COMPLAINT TO RECOVER

MONIES PAID UNDER PROTEST PURSUANT TO

HRS Sec. 40-35 FILED AUGUST 21, 2008

Plaintiff EXACT GAME FISHING, INC'S Motion for

Summary Judgment on First Amended Complaint to

Recover Monies Paid Under Protest Pursuant to HRS

§ 40-35 filed on August 20, 2008 ("Motion to Summary

Judgment") came on for hearing on Monday, November

3, 2008 at 9:00 a.m. before the Honorable Gary W.B.

Chang. Dennis Niles, Esq., appeared on behalf of

Plaintiff EXACT GAME FISHING, INC. and Damien

A. Elefante, Deputy Attorney General, appeared on

behalf of the Defendants DIRECTOR OF TAXATION,

STATE OF HAWAII and DEPARTMENT OF

TAXATION STATE OF HAWAII. The Court, having

considered the record and pleadings herein, the Motion

for Summary Judgment, memoranda, and arguments

presented at the hearing, and the Court having been

fully advised in the premises and good cause appearing

therefore,

ACCORDINGLY, IT IS HEREBY ADJUDGED,

ORDERED, AND DECREED that Plaintiff EXACT

GAME FISHING, INC.'s Motion for Summary

Judgment is hereby DENIED for the reasons stated at

)

the November 38, 2008 hearing.

29a

Filed 12/22/2008

Consolidated

CASE NO. 07-0072

CASE NO. 07-0073

CASE NO. 07-0074

IN THE TAX APPEAL COURT

OF THE STATE OF HAWAII

REEL HOOKER SPORTFISHING, INC.

Plaintiff,

VS.

DEPARTMENT OF TAXATION, STATE OF

HAWAII; KURT K. KAWAFUCHL, in his capacity as

DIRECTOR OF TAXATION, STATE OF HAWAITI,

Defendants.

EXACT GAME FISHING, INC.

Plaintiff,

DEPARTMENT OF TAXATION, STATE OF

HAWAII; KURT K. KAWAFUCHL, in his capacity as

DIRECTOR OF TAXATION, STATE OF HAWATI,

Defendants.

FINEST KIND, INC.

Plaintiff,

30a

DEPARTMENT OF TAXATION, STATE HAWAITI,;

KURT K. KAWAFUCHL, in his capacity as a

DIRECTOR OF TAXATION, STATE OF HAWATI,

Defendants.

KIND, INC'S MOTION FOR SUMMARY

JUDGMENT ON FIRST AMENDED COMPLAINT

TO RECOVER MONIES PAID UNDER PROTEST

PURSUANT TO HRS SEC. 40-35 FILED AUGUST

26 ,2008

Plaintiff FINEST KIND, INC.'s Motion for Summary

Judgment on First Amended Complaint to Recover

Monies Paid Under Protest Pursuant to HRS § 40-35

filed on August 26, 2008 ("Motion for Summary

Judgment") came on for hearing on Monday, November

3, 2008 at 9:00 a.m. before the Honorable Gary W. B.

Chang. Dennis Niles, Esq., appeared on behalf of

Plaintiff FINEST KIND, INC. and Damien A.

Elefante, Deputy Attorney General, appeared on behalf

of the Defendants DIRECTOR OF TAXATION,

STATE OF HAWAII and DEPARTMENT OF

TAXATION, STATE OF HAWAII.

The Court, having considered the record and pleadings

herein, the Motion for Summary Judgment,

memoranda, and arguments presented at the hearing,

and the Court having been fully advised in the premises

and good cause appearing therefore,

ACCORDINGLY, IT IS HEREBY ADJUDGED,

ORDERED, AND DECREED that Plaintiff FINEST

KIND, INC.'s Motion for Summary Judgment is hereby

DENIED for the reasons stated at the November 3,

2008 hearing.

sla

Filed 12/22/2008

Consolidated

CASE NO. 07-0072

CASE NO. 07-0073

CASE NO. 07-0074

IN THE TAX APPEAL COURT

OF THE STATE OF HAWAII

REEL HOOKER SPORTFISHING, INC.

Plaintiff,

VS.

DEPARTMENT OF TAXATION, STATE OF

HAWAII; KURT K. KAWAFUCHL, in his capacity as

DIRECTOR OF TAXATION, STATE OF HAWATI,

Defendants.

EXACT GAME FISHING, INC.

Plaintiff,

DEPARTMENT OF TAXATION, STATE OF

HAWAII; KURT K. KAWAFUCHI, in his capacity as

DIRECTOR OF TAXATION, STATE OF HAWATI,

Defendants.

FINEST KIND, INC.

Plaintiff,

32a

DEPARTMENT OF TAXATION, STATE HAWAII;

KURT K. KAWAFUCHL, in his capacity as a

DIRECTOR OF TAXATION, STATE OF HAWAII,

Defendants.

ORDER DENYING REEL HOOKER

SPCRTFISHING, INC.'S MOTION FOR SUMMARY

JUDGMENT ON FIRST AMENDED COMPLAINT

TO RECOVER MONIES PAID UNDER PROTEST

PURSUANT TO HRS § 40-35 FILED AUGUST 26,

2008

Plaintiff REEL HOOKER SPORTFISHING INC.'S

Motion for Summary Judgment on First Amended

Complaint to Recover Monies Paid Under Protest

Pursuant to HRS § 40-35 filed on August 26, 2008

("Motion for Summary Judgment") came on for hearing

on Monday, November 3, 2003 at 9:00 a.m. before the

Honorable Gary W.S. Chang. Dennis Niles, Esq.,

appeared on behalf of Plaintiff REEL HOOKER

SPORT FISHING, INC. and Damien A. Elefante,

Deputy Attorney General, appeared on behalf of the

Defendants DIRECTOR OF TAXATION, STATE OF

HAWAII and DEPARTMENT OF TAXATION,

STATE OF HAWAII.

The Court, having considered the record and pleadings

herein, the Motion for Summary Judgment,

memoranda, and arguments presented at the hearing,

and the Court having been fully advised in the premises

and good cause appearing therefore

ACCORDINGLY, IT IS HEREBY ADJUDGED,

ORDERED, AND DECREED that Plaintiff REEL-

HOOKER SPORT FISHING, INC.'s Motion for

oon

Summary Judgment is hereby DENIED for the

reasons stated at the November 3, 2008 hearing.

oda

CASE NO. 07-0072

CASE NO. 07-0073

CASE NO. 07-0074

(Consolidated)

IN THE LAND & TAX APPEAL COURT

OF THE FIRST CIRCUIT

STATE OF HAWATI

REEL HOOKER SPORTFISHING, INC., et al.

Plaintiffs,

DEPARTMENT OF TAXATION, STATE OF

HAWATT; KURT K. KAWAFUCHL, in his capacity as

DIRECTOR OF TAXATION, STATE OF HAWATI,

Defendant.

TRANSCRIPT OF PROCEEDINGS © before — the

Honorable GARY W.B. CHANG, Judge, presiding on

November 38, 2008.

(Clerk calls the case.)

R. NILES: Good morning, Your Honor. Dennis Niles on

behalf of the plaintiffs. With me is Mr. Hudson who is

the principal in the three companies.

MR. KLEFANTE: Good morning, Your Honor.

Damien [lefante on behalf of the Department. of

Taxation, State of Hawan-.

THE COURT: Good morning. Have a seat. [ wanted to

ask a historical or philosophical question. What is it that

soa

the Constitution and Congress was intending to do in

terms of these -- the tonnage provision as well as the

MTSA provision? What is it that they were trying to

accomplish?

MR. NILES: Would you like me to address

that?

THE COURT: That would be fine.

MR. NILES: And I think that's an insightful question

for this reason: The cases teach that we look to the

language of the statute to glean the intent of Congress.

And here it is, of course, our contention that the

language of the statute, Section 5B, i unambiguous. The

State has not argued that there is a provision that is

ambiguous, lends itself to uncertainty a to meaning. So

we look to the straight forward language of the statute

to glean what congress intended.

Now, we acknowledge that there are remarks in the

legislative history that counsel for the Department has

cited that would suggest that the statute was focused

on a specific issue. We cite other language when we set

out the more complete history of this particular

measure that indicates that the intent of congress gees

back to the fundamental issue of whether it is

appropriate for a state to tax revenue earned using

what is, I call, a federal waterway or a national

waterway. And that's the nub of it

We believe sincerely that this statu

characterized a an extension of com

tonnage clause, Supreme court de

the essence that you cannot tay

36a

these navigable waters, as a general revenue measure.

So in adopting the statute, they drew what we contend

is a very, very bright line.

Now, I want to add one other part that I think is critical

to, you know, the historical perspective. And that is

these companies pay the State of Hawaii a commercial

use fee for the facilities that they use at Lahaina

Harbor. So I want to dispel any concern on the part of

the Court that the plaintiffs are seeking a free lunch.

They are not seeking a free lunch. They are paying, and

we have presented evidence in the record that the

amount that they are paying exceeds any fair valuation

of the services that they actually receive.

THE COURT: Excuse me for interrupting, but I asked

a specific question. I understood your whole argument

about the harbor running at a profit because the fees

they collect are more than enough to run the operation.

So I'm not curious about that. Let me ask a different

question with a hypothetical. Let's say you have two

akuli vendors, both selling fish at Lahaina Harbor. One,

akuli vendor number one, is entirely land-bound. He

has a truck that's refrigerated. He drives into the

harbor and sells his akuli there. That's situation one.

Vendor number two, instead of being land-bound is

ocean-bound and catches the akuli in our navigable

waters and then comes to the harbor for his 30-minute

period of time, and in that 30-minute period of time on

the dock sells akuli.

Now, are you telling me that the State can tax the land

bound vendor but not the ocean-bound vendor for

general excise tax?

MR. NILES: We have not made that argument.

THE COURT: Well, that's why I asked the question.

What is the essence of what this legislation and tonnage

is designed to or addressing?

MR. NILES: To prohibit any nonfederal interest from

taxing a vessel, its crew or passengers when that vessel

is operating on navigable waters

THE COURT: And why is that?

MR. NILES: why

THE COURT: Why

MR. NILES: what was Congress thinking when

enacted this legislation

THE COURT: Yes

MR. NILES: It was, in my judgment what the

consideration was, these are federal waterways and it

has been long the doctrine that if vessels are operating

on federal waters, the State may charge them a fee for

use of facilities or services but it may not tax the use of

those waters as a general revenue measure. And so our

premises, Your Honor, our premise is that this statute

was intended to basically codify the notion that

earnings of a vessel operating on navigable waters are

beyond the reach of the taxing power of the State. And,

oda

I mean, when you have a statute the whole purpose of

citing the Aloha Airlines case was to drive home the

point where you have a statute that is free of ambiguity

and if that statute is within the power of Congress, that

is as far as this Court should go. It's as far as the

Supreme Court should go. It sets the framework.

And so even in Aloha Airlines, there are footnotes

where the Court said yes, there are questions about

what the motivation was and whether this was a proper

way of doing it, but the Supreme Court said we

understand that. But you don't look beyond the

language of the statute as the Hawau Supreme Court

had done in the Aloha Airlines case.

And so that's why it, to me, it comes back to the role of

this Court, and I recognize the challenge that this

Court faces. But we have a statute that is free of

ambiguity and it makes clear the State may not do this.

THE COURT: Why? And I focus the question on why.

Why is taxing the revenues generated by a navigable

water-bound vessel beyond the taxing power of the

State? Why? I there an evil associated with that? Is this

-- why? ‘shy is that beyond the taxing power of the

State?

MR. NILES: You have an instrumentality of commerce

in the form of the vessels and these vessels operate on

navigable waters. I want to get those predicates out

there. Once those predicates are established as in this

case, then it is the prerogative of congress to draw this

legislation as it deems fit. Okay?

39a

And I keep coming back to the notion, you know --

unfortunately, legislative history here is somewhat

sparse. But Aloha Airlines teaches you don't need to go

beyond the plain language of the statute if it is clear

and free of ambiguity.

Now, can I come back one? I'm reminded, as I speak,

that I haven't fully answered your question regarding

the akuli situation.

The fact of the matter is we have wrestled with that

question and we have decided in this case, because Mr.

Hudson has a commercial fishing license -- I believe

that's part of the record -- and he sells fish pursuant to

that commercial fishing license. It's not -- the Division

of Aquatic Resources requires the individual to hold the

fishing license and sell.

Mr. Hudson does that, And he sells his catch and he

pays excise tax on that transaction as well as income

tax on his net profit.

So, you know, I certainly reflected on that question,

whether or not -- and I basically concluded that that

was not an issue that we should challenge in this case,

that we should concede or at least not dispute --

concede is probably too forceful. But we would not

dispute for the very reasons that you cite. And so Mr.

Hudson, and certainly he sells fish that are caught

aboard these boats and, similarly, as the record would

indicate, if someone happens to have a good fortune of

catching a fish that they wish to have mounted, that

particular transaction, the mounting transaction, that's

subject to excise tax. We have never questioned that

40a

even though there's somewhat of a nexus or link to the

vessel.

But instead, we take the plain language of the statute.

And when we are talking about charter revenue, and

that's the basis of the tax in this case, that's an

inseparable part of the operation of the vessel itself on

these navigable waters.

So as intellectually stimulating as your question is, we

don't get there. And if we have learned anything from

Aloha Airlines -- because, again, there the Hawai'i

Supreme Court construed the statute and said, well,

Congress really wasn't intending to do this. And the

U.S. Supreme court said, well, yes, there may have

been unintended consequences and we can't really tell

why Congress did what it did, but CongressCongress

acted. And under our system, when Congress acts

within its authority and does so with clarity, I submit

that your job is very easy at that point.

THE COURT: Okay. Mr. Elefante, you have been very

patient.

MR. ELEFANTE: Your Honor, with respect to

answering your first question about the tonnage clause

and the commerce clause, the initial drafters of the

Constitution -- I admit, I'm not a historian on the

Constitution. But from the cases I have read, the

reasons why the commerce clause was enacted and the

tonnage clause was enacted was to promote free trade

between the States.

There's another factor with the export/import clause of

the Constitution that also comes into play. What the

4la

drafters of the Constitution wanted was free play

between the states and foreign countries. They had a

fear that the states individually would start taxing --

like each state would start taxing this one company for

all the business that they conducted between the states.

They wanted the business to come from foreign

countries, come into their states, unload whatever they

have, and leave. But that was only on the context of

transporting goods between the states and foreign soil.

The commerce clause has slowly developed throughout

time. And from the cases I read was that if a

corporation is incorporated within the state, they are

subject to all the state taxes. The Supreme Court

recognized that states have the power to tax within

their taxing jurisdiction. If a corporation is established

in that particular state, the state can tax it.

I think I cited to some other cases where there was a

case law that developed a home rule, a home situs for

businesses, especially corporations that do business in

more than one state. They always relied back onto that

particular rule, that if a corporation has situs in one

state, that particular state has the ability to tax not

only the income, but any revenue that’s generated

within that state.

The commerce clause has slowly developed that

particular idea saying, okay, if this particular vessel or

corporation has situs in different states, the fear that

they had -- the fear that Congress had or the drafters

had was that the states, instead of just taxing their

portion of it, they would be taxing the whale, I guess,

income of the corporation.

42a

For example, if a corporation has a hundred dollars

worth of income, it has a home state in California, also it

can establish situs in Washington State, what the --

what Congress and what the Supreme court has slowly

drafted was, well, if they have dual entities or dual

states that they do business in, the state can only tax

that percentage or that amount that they have

property in. So if that corporation has 70% of their

business conducted in California and 30% is in

Washington State, Washington State can tax 30% and

then California can tax 70%.

The duty of tonnage is basically to allow -- it's to

prevent the imposition of an additional tax when they

come into court. Basically they are saying if you are

going to come into two courts, basically, we are going to

tax whatever basically at that time was tonnage

because of the amount of the vessel was measured by

tonnage at that point. They wanted to prevent that

particular idea.

But in this case, we have a corporation who's in the

State, that does only business in the State, has to come

on to Hawaii property or Hawaii lands to conduct their

business. There's no -- as far as the Constitution goes,

nothing prevents the State from taxing that particular

corporation, or in this particular case corporations.

The statute that Mr. Niles has presented, Section 5, if

you read the statute, all it is, and what have argued, it's

jut an addition of the commerce clause and tonnage

clause issues that were presented in front of the

Supreme Court. They haven't changed. They have

recognized the home court rule, the commerce clause

rules, with respect to that particular Section 5.

43a

If you look at the legislative history, the only intent for

that particular bill was the concern that ships that pass

through waters next to a county were being taxed by

the local community without even landing on their soil.

The arguments -- I guess there was arguments saying

they do have the problem with tax or don't have the

problem with the tax. That would be the Constitutional

problems that would have arised. This bill only clarifies

it. Unless you have a status or situs in the Mate, you

can't tax the vessel.

So, I mean, the State in this case can tax because the

corporation is in the State, does business in the State.

Congress has recognized that states have the ability to

tax within their jurisdiction, as well as the Supreme

Court has said if it's within our jurisdiction, we can tax

despite the act that the taxpayers in this case go out

more than three miles and come back. But the thing is

they are not going anywhere. All they are doing is

going out and coming back in the same state boundary,

so to speak. So the State in this case can impose a

general excise tax on the corporation. We are not

imposing it on the vessel itself. We are not saying the

vessel has to be charged a general excise tax every

time it has to enter. What it is, the general excise tax is

an imposition on the corporation that's incorporated in

the State's income from whatever source they derive it

from. So in that sense it's not even a duty of tonnage

and it’s not an imposition of a tax that prevents the

corporation vessels from sailing out of port. So in that

sense it doesn't offend the constitution nor does it

impinge on Section 5.

The argument that Mr. Niles had made with respect to

how clear Section 5 and what can be imposed or what

44a

can be imposed, and he uses the Aloha Airlines

example, if it was the intent of congress to eliminate the

ability of a state to tax on the income, let's say in this

case water transportation, it would have said it clearly

as it did in the Aloha Airlines case. Basically that the

statute in the case -- I think I put it in my reply brief --

basically says you couldn't -- the states could not tax

the income derived from air transportation or gross

receipts derived from it. So that language clear enough

on its face that income tax or general excise tax is going

to be imposed on it.

In this case all it says no tolls, no taxes, no operation of

charges or other impositions on a vessel while the

vessel is in transport or basically while it's moving over

water. And if you look at that language and if you look

at the legislative history, the only idea you get is if the

vessel is passing through a -- passing through navigable

waters, the State, unless it -- unless it's a corporation in

the State, can't impose any type of taxes or tolls for the

vessel to operate in that particular body of water.

THE COURT: Okay. Mr. Niles.

MR. NILES: very briefly.

For purposes of this motion, we are not challenging the

ability of the Mate to tax corporations. We are not --

this case is not before you challenging the taxing power

of the State.

Assuredly, the constitution, through the commerce

clause as construed by the Supreme court and the

tonnage clause and export/import clause, those

provisions place outer limits on the State's taxing

45a

power. And so long as a taxing measure falls within the

ambit of those provisions as construed by the Supreme

Court, the State doesn't have a problem, it can do what

it's doing.

The difficulty for the State is that Congress, in

exercising its power, has reduced or expanded the size

of the net, depending on your metaphor. It has

prohibited all taxes.

And in response to the comment that, well, Congress

didn't use the word gross receipts or general excise, it

didn't need to. The statute is very clear. It says no

taxes or any other impositions whatsoever. So the idea

is they wanted the net to be cast a broadly a Congress'

authority could cast it. That's what happened here.

Now, they did create some exceptions. And it's our

submission that it was the burden of the State of

Hawaii to come forward and show that this particular

revenue measure fell within one of the _ specific

exceptions delineated by Congress, and they can't do

that. That's the problem. That's why we keep coming

back with the evidence that the amounts paid have

nothing to do with the value of a service or facility

that's available to the vessels. So they can't -- even

though that's their burden, we, through our motion,

negated that possibility. So it comes down to it doesn't

matter whether or not as an abstract constitutional

proposition, this was within the power the State. What

it comes down to is whether or not the Congress has

curtailed the exercise of that party, that right. And it's

just very clear.

46a

And yes, Aloha Airlines talked about an instance where

the focus of the statute in Aloha Airlines was the

taxation of passengers. Here we have the taxation of

the instrumentality itself, and that's what's been

prohibited. And it's simply not, you know, Gloucester

Ferry long ago laid to rest the notion that you could tax

the corporation as a way of evading the prohibition on

the taxation of the instrumentality. They recognize

there's no difference. And counsel, the Department, has

not attempted to even argue to the contrary.

So it's not the taxing power that's before the Court. It

is rather whether Congress has curtailed that power by

prohibiting the taxation of vessels through whatever

label the State might try to.

And so we think, Your Honor, you can see by the

volume of the filings that the lawyers have really

labored industriously in submitting this case to you.

But it comes down to a simple proposition: Does this

federal statute on its face prohibit the assessment of

taxes under the undisputed facts of this case --these

uses. And we submit that the only conclusion the

statute allows is yes, these taxes are no longer

assessable.

MR. ELEFANTE: Just one last point to argue with

respect to the Gloucester case that Mr. Niles has

pointed out to.

THE COURT: Can you spell that, please.

MR. ELEFANTE: It's spelled

47a

G-L-O-U-C-E-S-T-E-R, Ferry Company. I think if you

look on the reply for Mr. Niles, it's attached as

Appendix A. That particular case recognized it was a

commerce clause issue. That case also recognized that

the home rule, the one I have explained to the Court

with respect to the State's ability to impose a tax on the

corporation that's within the State.

In this case, if the corporation is in the State, it's

subject to the taxes in the State. | think the confusion

here is we're equating vessels with corporations which

is problematic because the general excise tax is only a

tax on a corporation's business income in the State. It's

not an imposition on a vessel when it sails. It's admitted

that the taxpayer does business in the State, so,

therefore, it's subject to the taxes in the State. And

throughout time, I guess from the beginnings, the

Supreme Court has recognized the State's ability to tax

its own citizenry, it's imposition of all its citizens.

I don't think Congress wanted to go beyond their

bounds with respect to eliminating the State's ability to

tax their own citizens and corporations within the

State. I think that's the 10th Amendment or 11th

Amendment, right for the states to tax their own

corporations.

I think throughout, Congress has to recognize that the

State has its ability to, like I said, tax its own

corporation within the State. And in this case, it's

within the State and within the State's right to impose

a general excise tax. I don't think Congress wanted to

eliminate that factor.

Aka

If we use Mr. Niles' argument and extend it beyond the

general excise tax, it conceivably, it might impose on

the income tax. We might argue that they are not

subject to the income tax based on this particular

statute. [ don't think Congress wanted to eliminate that

particular idea, that the state could not impose income

tax on a corporation within the state. Based on the

reading, you could also argue that the passengers, if

they are in the state, is not subject to the income tax or

general excise tax if they are sailing on waters. It just

opens up a whole new basically a slippery slope with

respect to the arguments that the taxpayers are

arguing in this case. If you stick with the idea that the

State has the ability to control within its boundaries or

within its jurisdictions and have the ability to tax its

own citizens and corporations and the businesses that

are conducted in the State, I think throughout time and

throughout congress has recognized that particular

principle.

So in this case the general excise tax is’ basically

constitutional and within the States power to impose.

MR. NILES: Your Honor, if | may beg the indulgence

of the court, I have to respond. We both cite Gloucester

Ferry, and we cite it for different propositions.

One thing that the Supreme court has made very clear,

and it did so in a case even last year, 2007, Congress has

to be presumed to know what the law is. And the law at

the time that the Marine Transportation Security Act

was amended in 2002, the law, based on Gloucester

Kerry, was a tax on the earnings of a vessel is no

different than a tax on the vessel. So congress

understood that by taxing the entity -- excuse me.

49a

Congress understood by prohibiting the taxation of the

vessel by any means, that it was prohibiting taxation

indirectly through the owners of the vessel, the

operators of the vessel.

And that's why I pose the rhetorical question at the end

of my memo. How else would the State enforce a tax on

a vessel except through taxation of its owners and

operators? And they can't answer that question. And

they need not answer the question because that issue

was laid to rest a long time ago in Gloucester Ferry

when the Supreme Court said you cannot tax dividends

or the capital stock of an operator of a licensed and

enrolled vessel because that is the same thing as taxing

the vessel directly.

And so we -- you have to assume that Congress, in its

wisdom, understood when it said no taxes on vessels,

understood that that would reach the operator of the

vessel. It just -- it is, I'm afraid, quite obvious from the

wording.

So we stand on the language of the statute for the

reasons that we have argued that provides a fully

adequate basis for granting plaintiff summary

judgement.

The recourse for the Department of Taxation, if they

feel that this outcome is unjust, their recourse is to

Congress, which is exactly what happened in the Aloha

Airlines case. The State went back to Congress and the

law was amended to allow a sales tax in the context of

that case. But it is not for this Court, given the clear

language of the statute, to take it upon itself to amend

the statute through an interpretation that we would

50a

submit would be contrary to the plain words used by

Congress, which we argue should be respected. Thank

you.

MR. ELEFANTE: Just one last point on the

Gloucester case, Your Honor. The particular facts in

that case was a corporation that was incorporated in

New Jersey and the taxing entity in this case was

basically, I think it was Philadelphia. So what I

remarked earlier with respect to the commerce clause

is Whether or not the City of Philadelphia could tax this

particular ferry company that's incorporated in New

Jersey.

And like I said, the case clearly indicates that if New

Jersey was in question, whether or not New Jersey

could tax this particular ferry company, it would and it

could tax that ferry company. If you go with Mr. Niles

argument that if Congress recognized this particular

ease. then you have to assume that they also recognize

the fact that the home state where corporation is

incorporated, where the boats are in their port, the

state can tax the income not only from the business, but

also the vessels, Your Honor.

But like I said, the imposition of the general excise tax

is only on the corporation, it's not on the vessel itself.

The vessel can sail in and out of the harbors. It does not

have to pay the general excise tax to do that. It doesn't

have to pay the general excise tax to operate its

vessels. Like I said, the general excise tax is only an

imposition on the income that is generated from the

business that the corporation is conducted in the state,

which State or which case law has indicated throughout

history that the State can impose on the corporation.

So I think with respect to that historical background,

the state has the ability to tax this entity, Your Honor.

THE COURT: Anything else, Mr. Niles?

MR. NILES: I will resist the temptation. I think we

have belabored the argument and the Court can read

the statute. And we have made -- presented the

argument how it should be applied under the facts of

these cases and we would ask that judgment be entered

accordingly

THE COURT: Okay. What a fascinating set of motions

and a fascinating issue. This case really caused he Court

to do some deep thinking about the commerce clause,

the duty of tonnage and what was motivating the

federal government to amend the -- I call it MTSA. I

think you refer to that as the statute, Section 5. And

the court is significantly persuaded that what Congress

was focused on was the problem and the burden of this

vessel on navigable waters as an instrumentality of

interstate commerce being taken advantage of by the

many parts it must pass through by the sovereigns of

those many ports imposing a tax on the ability of the

vessel to enter or leave the port without conducting any

significant business, including -- not tncluding loading

and unloading. And I. think wha congress Was

persuaded to do was to attempt to prevent these taxing

authorities in the many ports from simply taking the

opportunity to levy a tax upon the vessel when the

vessel has -- conducts no business other than entering,

exiting and loading and unloading.

So there was some protection afforded to these vessels

and its owners when Section 5 was amended in 2002.

)

o2a

We have a situation here where the vessels involved

are not merely passing through Lahaina Harbor, but

instead are essentially based in Lahaina Harbor and

then conducting a commercial fishing or passenger

transport business under the laws of the State of

Hawai'i. So we have a situation where the taxpayer is

no stranger to the State of Hawaii and its laws and, in

fact, is engaging in ongoing regular and quite robust

business, it seems to the Court. And that is what think

the general excise tax is created to do, is to impose a

tax upon this privilege of doing business.

> siceniadatiiiee — - - — a , aco +h, IMRAN

Both counsel have pointed out that that is the purpose

of the general excise tax. It is privilege tax.

And so when the Court looks at the history of the

tonnage and commerce clause and Section 5 legislati

the Court believes the situation addressed in those

pieces of legislation is distinguishable from the facts in

this case. And to uphold the taxpayer's view would be

to misapply either the duty of tonnage principle, the

yMNer >|. ry] >} : > Qopty YS nwneinie

commerce clause principles or Section 5 principles.

Because we have a distinctly different situation in the

cases at bar, the taxpayer was not simply entering,

exiting or unloading in the Lahaina Harbor. It was

transacting its business and Lahaina Harbor was the

situs of picking up and dropping off their passengers

} ] . t oS o ite

and availing itself of the privilege of conducting

business in the harbor

So, the Court is of the mind that the Section 5 and the

duty of tonnage principles in this case would not

prohibit the State from imposing general excise tax

upon the revenues generated by the commercial

oo0a

operations of the taxpayer.So for these and any other

good cause shown in the record, the Court will

respectfully grant the Director's motion and deny the

taxpayer's motion. I think each one of them filed a

motion.

Mr. Elefante, I don't think that the Court intends for

the orders to recite findings of fact or conclusions of

law. I merely tried to give the record some flavor of

what the Court's thinking is, so that if this matter goes

up on appeal, the appellate courts can try to understand

what this Court was doing and why it did what it did.

So a simple order granting your chent's motion and

denying the taxpayer's motions, all separate orders, if

you will. So four orders I'm asking you to prepare.

MR. ELEFANTE: Yes. Your Honor.

THE COURT: All right. Mr. Elefante, any further

statement or record to be made at this time?

MR. ELEFANTE: No, Your Honor.

THE COURT: Mr. Niles, any further statement or

record to be made?

Mr. NILES: Thank you. No, Your Honor.

THE COURT: Thank you very much.

(Proceedings concluded.)

oda

Congressional Record: November 22, 2002

(Extensions) |

[Page E2143-E2144]

From the Congressional Record Online via GPO Access

[wais.access.gpo.gov ]

[DOCID:cr22n002-75 |

CONFERENCE REPORT ON S. 1214, MARITIME

TRANSPORTATION SECURITY ACT OF 2002

speech of HON. DON YOUNG of Alaska in the house of

representatives Thursday, November 14, 2002

Mr. YOUNG of Alaska. Mr. Speaker, I rise to speak

about the Conference Report on S. 1214, which the

House approved last week and is now ready for

signature by the President. I would like to point out a

particular concern that is addressed in Section 445 of

the conference agreement. Section 445 addresses the

current problem, and the potential for greater future

problems, of local jurisdictions seeking to impose taxes

and fees on vessels merely transiting or making

innocent passage through navigable waters subject to

the authority of the United States that are adjacent to

the taxing community. We are seeing instances in

which local communities are seeking to impose taxes or

fees on vessels even where the vessel is not calling on,

or landing, in the local community. These are cases

where no passengers are disembarking, in the case of

passenger vessels, or no cargo is being unloaded in the

case of cargo vessels and where the vessels are not

stopping for the purpose of receiving any other service

offered by the port. In most instances, these types of

taxes would not be allowed under the Commerce

Clause of the United States Constitution.

a0a

Unfortunately, without a statutory clarification, the

only means to determine whether the burden is an

impermissible burden under the Constitution is to

pursue years of litigation.

Section 445 of the Conference Report addresses this

problem by clarifying the sole circumstances when a

local jurisdiction may impose a tax or fee on vessels.

Local governments, and other non-Federal interests,

may impose taxes or fees only under an existing

exception under the Water Resources Development

Act or under extremely limited circumstances in which

reasonable fees can be charged on a fair and equitable

basis for the cost of service actually rendered to the

vessel. The fees must also enhance the safety and

efficiency of interstate and foreign commerce and

represent at most a “small burden” on interstate and

foreign commerce. Generally, taxes will not be allowed

under this section. The sole exceptions are stated in

Section 445.

Mr. President, I support Section 445 as an important

correction of a silence in current law that should not be

allowed to imperil legitimate commerce.

o6a

107TH CONGRESS

Report

HOUSE OF REPRESENTATIVES

2d Session

107-777

MARITIME TRANSPORTATION SECURITY ACT

OF 2002

i November 13, 2002- Or dered to be printed

iE (Mr. Y OUNG 0 of. Alaska, ‘fr om n the ¢ committee eof

‘conference, submitted the following

[CONF ERENCE REPORT

( [Toa ac company S 2. 214]

The committee of conference on the disagreeing votes

of the two Houses on the amendment of the House to

the bill (S. 1214), to amend the Merchant Marine Act,

1936, to establish a program to ensure greater security

for United States seaports, and for other purposes,

having met, after full and free conference, have agreed

to recommend and do recommend to their respective

Houses as follows:

That the Senate recede from its disagreement to

the amendment of the House and agree to the

same with an amendment as follows:

In lieu of the matter proposed to be inserted by

the House amendment, insert the following:

TITLE IV--OMNIBUS MARITIME

IMPROVEMENTS

SEC. 401. SHORT TITLE.

This title may be cited as the “Omnibus

Maritime and Coast Guard Improvements Act

of 2002".

SEC. 445. PROHIBITION ON NAVIGATION

FEES.

Section 4 of the Rivers and Harbors

Appropriation Act of 1884 (83 U.S.C. 5) is

amended as follows:

(1) The existing text is designated as

subsection (a).

(2) The following is added at the end:

(6) No taxes, tolls, operating charges, fees, or

any other impositions whatever shall be levied

upon or collected from any vessel or other water

craft, or from its passengers or crew, by any

non-Federal interest, uf the vessel or water craft

is operating on any navigable waters subject to

the authority of the United States, or under the

right to freedom of navigation on those waters,

except for--

(1) fees charged under section 208 of the

Water Resources Development Act of 1986

(33 U.S.C. 2286): or

o8a

(2) reasonable fees charged on a fair and

equitable basis that--

(A) are used solely to pay the cost

of a service to the vessel or water

craft;

(B) enhance the safety and

efficiency of interstate and foreign

commerce; and

‘(C) do not impose more than a

small burden on interstate or

foreign commerce...

99a

108TH CONGRESS

Report

HOUSE OF REPRESENTATIVES

lst Session

108-334

--VISION 100--CENTURY OF AVIATION

REAUTHORIZATION ACT

October 29, 2003- Ordered to be printed

Mr. YOUNG of Alaska, from the committee on

conference, submitted the following

CONFERENCE REPORT

(To accompany H.R. 2115]

The committee of conference on the disagreeing votes

of the two Houses on the amendment of the Senate to

the bill (H.R. 2115), to amend title 49, United States

Code, to reauthorize programs for the Federal Aviation

Administration, and for other purposes, having met,

after full and free conference, have agreed to

recommend and do recommend to their respective

Houses as follows:

That the House recede from its disagreement to the

amendment of the Senate and agree to the same with

an amendment as follows:

In leu of the matter proposed to be inserted by the

Senate amendment, insert the following:

60a

The legislation includes a section that amends section

4(b) of the Rivers and Harbors Appropriations Act of

1884 to clarify that the restriction in that section with

respect to taxes on vessels or other water craft does not

apply to property taxes on vessels or water craft, other

than vessels or water craft that are primarily engaged

in foreign commerce, so long as those taxes are

constitutionally permissible under long-standing

judicial interpretations of the Commerce Clause. To

assure the consistent application of legal principles

concerning non-Federal taxation of interstate

transportation equipment, the amendment in this

section is effective as of November 25, 2002. Over the

years, the U.S. Supreme Court has ruled on the

constitutionality of property taxes on various forms of

interstate and international transportation equipment

in a number of cases, including but not limited to

Pullman's Palace Car Co. v. Pennsylvania, 141 U.S. 18

(1891) (railroad rolling stock); Ott v. Mississippi Valley

Barge Line Co., 336 U.S. 169 (1949) (barges on inland

waterways); and Braniff Airways, Inc. v. Nebraska

State Board of Equalization, 347 U.S. 590 (1954)

(domestic aircraft); Complete Auto Transit, Inc. v.

Brady, 430 U.S.

274 (1977); and Japan Line v. County of Los Angeles,

441 U.S. 434 (1979). This line of decisions has sustained

property taxes in interstate transportation cases when

the tax is applied to an activity with a substantial nexus

with the taxing entity, is fairly apportioned, does not

discriminate against interstate commerce, and is fairly

related to the services provided by the taxing entity.

The exception for state and local taxes on vessels or

watercraft that are primarily engaged in foreign

commerce implements the holding of the Japan Line

bla

case. The committee notes that section 4(b) does not

affect whether sales or income taxes are applicable with

respect to vessels. The purpose of section 4(b) was to

clarify existing law with respect to Constitutionally

permitted fees and taxes on a vessel, but also to

prohibit fees and taxes imposed on a vessel simply

because that vessel sails through a given jurisdiction.

624

Public Law 108-176

108th Congress

An Act

To amend title 49, United States Code, to reauthorize

programs for the Federal Aviation Administration, and

for other purposes.

Be it enacted by the Senate and House of

Representatives of the United States of America in

Congress assembled,

SECTION 1. SHORT TITLE; TABLE OF

CONTENTS.

(a) SHORT TITLE.—This Act may be cited as the

“Vision 100—

Century of Aviation Reauthorization Act”.

(b) TABLE OF CONTENTS.—tThe table of contents

for this Act is as follows:

SEC. 829. NAVIGATION FEES.

(a) IN GENERAL.—Section 4(b) of the Rivers and

Harbors Appropriation

Act of July 5, 1884 (83 U.S.C. 5(b); 116 Stat. 2133), is

amended—

(1) by striking “or” at the end of paragraph (1);

(2) by striking the period at the end of paragraph (2)

and inserting “; or”; and

(3) by adding at the end the following:

“(3) property taxes on vessels or watercraft, other than

vessels or watercraft that are primarily engaged in

foreign commerce if those taxes are permissible under

the United States Constitution.”.

(b) EFFECTIVE DATE.—The amendment made by

subsection (a) is effective on and after November 25,

2002.

63a

89-006

111TH CONGRESS

Rept. 111-803

HOUSE OF REPRESENTATIVES

Ist Session

Part 1

--COAST GUARD AUTHORIZATION ACT OF 2010

OCTOBER 16, 2009- Committed to the Committee of

the Whole House on the State of the Union and ordered

to be printed

Mr. OBERSTAR, from the Committee on

Transportation and Infrastructure, submitted the

following

REPORT

(To accompany H.R. 3619]

[Including cost estimate of the Congressional Budget

Office |

The Committee on Transportation and

Infrastructure, to whom was referred the bill

(H.R. 3619) to authorize appropriations for the

Coast Guard for fiscal year 2010, and for other

purposes, having considered the same, report

favorably thereon with an amendment and

recommend that the bill as amended do pass.

The amendment is as follows:

Strike all after the enacting clause and insert the

following:

SECTION 1. SHORT TITLE.

(a) Short Title- This Act may be cited as the

‘Coast Guard Authorization Act of 2010’.

(b) Table of Contents- The table of contents for

this Act is as follows:

TITLE ITI--SHIPPING AND NAVIGATION

Sec. 301. Goods and services.

64a

Sec. 302. Seaward extension of anchorage grounds

jurisdiction.

Sec. 303. Maritime Drug Law Einforcement Act

amendment-simple possession.

Sec. 304. Technical amendments to tonnage

measurement law.

Sec. 305. Adjustment of liability limits for natural gas

deepwater ports.

Sec. 306. Period of limitations for claims against Oil

Spill Liability Trust Fund.

Sec. 307. Merchant mariner document standards.

Sec. 308. Report on Coast Guard determinations.

Sec. 309. Ship emission reduction technology

demonstration project.

Sec. 310. Phaseout of vessels supporting oil and gas

development.

Sec. 311. Arctic marine shipping assessment

implementation.

Sec. 312. Supplemental positioning system.

Sec. 313. Dual escort vessels for double hulled tankers

in Prinee William Sound, Alaska.

* KK

TITLE III--SHIPPING AND NAVIGATION

SEC. 301. GOODS AND SERVICES.

Section 4(b) of the Act of July 5, 1884, commonly

known as the Rivers and Harbors Appropriation

Act of 1884 (83 U.S.C. 5(b)), is amended--

(1) by striking ‘or' at the end of paragraph

(2)(C);

(2) by striking the period at the end of

paragraph (3) and inserting °; or'; and

(3) by adding at the end the following:

(4) sales taxes on goods and services

provided to or by vessels or watercraft

bda

(other than vessels or watercraft

primarily engaged in foreign commerce)...

kK ok

TITLE ILI--SHIPPING AND NAVIGATION

Title III amends statutes relating to shipping and

navigation in U.S. waters.

Sec. 801. Goods and Services

Section 301 clarifies that non-Federal sales taxes on

goods and services may be levied upon, or collected

from, vessels when the vessel is operating on any

navigable water subject to the authority of the United

States.

66a

HR 3619 EAS

In the Senate of the United States,

May 7, 2010.

Resolved, That the bill from the House of

Representatives (H.R. 3619) entitled “An Act to

authorize appropriations for the Coast Guard for fiscal

year 2010, and for other purposes.', do pass with the

following

AMENDMENT:

Strike out all after the enacting clause and insert:

SECTION 1. SHORT TITLE.

This Act may be cited as the “Coast Guard

Authorization Act for Fiscal Years 2010 and

2O1T".

SEC. 2. TABLE OF CONTENTS.

The table of contents for this Act is as follows:

Sec. 1. Short title.

Sec. 2. Table of contents.

TITLE VI--SHIPPING AND NAVIGATION

Sec. 601. Technical amendments to

chapter 318 of title 46, United States Code.

Sec. 602. Clarification of rulemaking

authority

67a

Sec. 608. Icebreakers.

Sec. 604. Phaseout of vessels supporting

oil and gas development.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.